Bright Health Group, Inc.'s (BHG) CEO Mike Mikan On Q4 2021 Results - Earnings Call Transcript

Bright Health Group, Inc. (NYSE:BHG) Q4 2021 Earnings Conference Call March 2, 2022 8:00 AM ET

Company Participants

Stephen Hagan - Director, Investor Relations

Mike Mikan - President and Chief Executive Officer

Cathy Smith - Chief Financial Officer and Chief Administrative Officer

Conference Call Participants

Lisa Gill - JPMorgan

Kevin Fischbeck - Bank of America

Eric Glynn - Barclays

Jeff Garro - Piper Sandler

Justin Lake - Wolfe Research

Jason Cassorla - Citi

Gary Taylor - Cowen

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Operator

00:06 Hello and welcome to today’s Bright Health Group’s Fourth Quarter 2021 Earnings Conference Call. My name is Elliot and I’ll be coordinating your call today. [Operator Instructions]

00:20 I would now like to hand over to our host, Stephen Hagan, Director of Investor Relations. Please go ahead.

Stephen Hagan

00:28 Good morning and welcome to Bright Health Group’s fourth quarter 2021 earnings conference call. A question-and-answer session will follow Bright Health Group’s prepared remarks. As a reminder, this call is being recorded. Leading the call today are Bright Health Group’s President and CEO, Mike Mikan; and CFO and Chief Administrative Officer, Cathy Smith.

00:48 Before we begin, we want to remind you that this call may contain forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.

01:05 A description of some of the risks and uncertainties can be found in the reports that we filed with the Securities and Exchange Commission, including the risk factors in our current and periodic reports we file with the SEC. Except as required by law, we undertake no obligation to revise or update any forward-looking statements or information. This call will also reference non-GAAP amounts and measures.

01:29 A reconciliation of the non-GAAP to GAAP measures is available in the company’s fourth quarter press release available on the company’s Investor Relations page at investors.brighthealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated March 2, 2022, which may be accessed from the Investor Relations page of the company’s website.

01:55 Before we start the call, I would like to note that Bright Health Group will be participating in two upcoming investor conferences. Management will be presenting at the Cowen Health Care Conference on Monday, March 7; and hosting an Investor Meetings at the Barclays Health Care Conference the following week.

02:11 With that, I will now turn the conference call over to Bright Health Group’s Chief Executive Officer, Mike Mikan.

Mike Mikan

02:19 Thank you, Stephen. Good morning everyone and thank you for joining Bright Health Group’s fourth quarter earnings call. I’ll provide some brief introductory comments and then turn the call over to Cathy Smith to discuss our fourth quarter and full-year 2021 results. I’ll then conclude our prepared remarks by going over the specific actions we are taking to improve near-term performance and best position Bright Health Group to drive sustainable profitability and long-term success.

02:52 We always start with our mission, which is central to what we do at Bright Health Group, making healthcare right together is built on the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, we can deliver better outcomes at a lower cost for all consumers.

03:12 Bright Health Group is building a truly unique model that we believe will transform how healthcare has delivered. We believe when healthcare is delivered in a fully aligned and integrated care model, we can bend the cost curve and most importantly enhance value for both consumers and providers.

03:35 Bright Health Group achieved substantial growth in 2021, reaching over $4 billion in revenue and we are enthusiastic about our positioning for 2022. Having reached the milestone of over 1 million health plan members, we now expect enterprise revenue for 2022 of $6.8 billion to $7.1 billion, due to the strength of our member growth in OEP and AEP, as well as external payor growth at NeueHealth.

04:07 We have always expected some variability in our results. As we executed on our strategy to quickly gain scale in the business and as we closed out 2021, we saw that play out. The meaningful growth we delivered in 2021, which was a combination of higher than anticipated growth to start the year and additional growth from the special enrollment period, outpaced our operational and system capabilities.

04:37 In addition, unique factors in 2021 that we have preciously highlighted, including a once in a century pandemic and our large group of new members without risk scores combined with scaling up our organizational capabilities and emerging technologies impacted our results into the fourth quarter more significantly than anticipated.

05:02 As Cathy will discuss in more detail, these factors impacted our ability to engage with our members in order to accurately capture their underlying health conditions and impacted prior period medical costs as we caught up on claims processing. Despite a challenging 2021, our larger base of business along with continued growth in 2022 affords us a tremendous platform to continue executing on our strategy in driving long-term shareholder value.

05:36 We have conviction on the differentiator results that we can drive through a fully aligned care model and are taking specific actions to focus the company, improve our systems and process, and drive profitable growth.

05:52 We are continuing to invest in building out our NeueHealth Business and have successfully expanded NeueHealth owned clinics outside of the Florida market, while also continuing to build our affiliated care partner network across the country.

06:09 All of the challenges we encountered this past year can be attributed to specific areas that were already on our list for improvement, but the growth we experienced exasperated the gaps in performance.

06:23 We made significant progress correcting these issues in our operational capabilities in 2021, which will help drive improved 2022 performance. And we see opportunities for substantial further improvement over the course of 2022. Bright Health Group's differentiated model continues to attract members and drive strong growth.

06:47 We remain on the path we outlined at our Investor Day in December, and our core strategy hasn't changed as we look to serve consumers with a fully aligned care model that drives better care in lower medical costs.

07:02 Within this strategy, we are refining our model and we are taking actions to drive better performance in 2022 and beyond, as we continue to target breakeven adjusted EBITDA in 2024. Our 2022 guidance reflects the pricing actions and medical cost initiatives we took and the improvements that we've made to our business, balance with the work that is still outstanding for this year.

07:31 While we appreciate the team that got us here, as we move to the next phase in our growth and strategy, we need different talent and skills and have taken action accordingly. Consistent with this evolution, we were pleased to announce yesterday that Matt Manders joined our Board as an Independent Director. Matt recently retired from Cigna as the President of their Government and Solutions segment and is an experienced healthcare operator. We expect Bright Health will benefit from his experience in the consumer directed healthcare space and in healthcare solutions given his deep expertise in both areas.

08:13 And now Cathy Smith, our CFO and Chief Administrative Officer will take us through our results and then I'll provide some additional comments on the actions we have taken to drive improved results in 2022 and position us for long-term success. Cathy?

Cathy Smith

08:31 Thank you, Mike, and good morning, everyone. I'll begin by going over our fourth quarter and year-to-date results, and will then provide updated guidance for our 2022 full-year outlook. In many aspects, we accomplished a lot in 2021.

08:45 However, we did not deliver the financial results we had planned. Let me be clear, we are very disappointed in our financial results and are swiftly working to improve and provide more predictability into our results.

09:00 Our fourth quarter top-line results continue to reflect the strength of our 2021 member and revenue growth. Bright Health Group consolidated revenue increased 167% year-over-year to $962.3 million in Q4.

09:16 Bright HealthCare segment revenue for Q4 grew [169%] [ph] year-over-year to $949.8 million and NeueHealth fourth quarter segment revenue of $107.5 million compares to just under $10 million in the prior year.

09:32 Our fourth quarter gross margin was a loss of $351.2 million and our adjusted EBITDA was a loss of $790.1 million, with both items impacted by our increased risk adjustment and IBNR estimates, continued COVID costs, and a non-cash $103 million 2022 premium deficiency reserves.

09:56 The significant deterioration in our results since our guidance was due to specific identifiable issues, including COVID costs, catching up on claims payments, and resolving resubmitted claims. This was compounded by our lack of visibility into lagging medical claims on our legacy operational systems, which require manual processing.

10:20 We have improved our claims processing operations and procedures and as we started 2022, we were operationally in a significantly stronger position. A key driver of improvement is the move to our new claims management and administrative platform for our new markets and improved processes and workflows for all of our markets.

10:44 The increases in medical costs due to COVID and the top-line headwinds associated with risk adjustments are reflected in our medical cost ratio in the quarter. On a reported basis, our fourth quarter 2021 MCR at the enterprise level was 134.1%, up from 105.4% in the fourth quarter of 2020.

11:07 COVID had a negative impact on our MCR in the fourth quarter of 860 basis points, compared to 650 basis points in Q4 of 2020. The fourth quarter 2021 COVID impact to our MCR included $56.5 million of COVID costs related to prior quarters, which contributed 580 basis points of the MCR impact recognized in the quarter.

11:31 Our risk adjustment performance in the fourth quarter also reflected the claims processing issues where our challenges in capturing the risk of the population was in part due to the lack of timely insight into data, which drove the insufficient engagement in care management.

11:48 We increased our risk adjustment payable estimate by $148 million reducing fourth quarter revenue of which $111 million relates to prior quarters. We also recognized $139 million in prior period medical costs in Q4. The combined impact of the prior period risk adjustment estimate changes and the prior period medical costs was 26.4 percentage points to our medical cost ratio in Q4.

12:16 Our expense ratios were also impacted by the non-cash GAAP premium deficiency reserve of $103 million we booked in anticipation of future loss contracts in certain markets in 2022.

12:31 Turning to our full-year 2021 results, compared to the full-year 2020, our revenue increase of 234% reflects strong membership growth, including the contribution from SEP. Full-year 2021 Bright Health Group revenue was over $4 billion. Our membership growth throughout the year, the inability to capture the risk of the population reserve and direct COVID costs drove substantial MCR deterioration in 2021.

13:01 Our full-year adjusted EBITDA declined to a loss of $1.08 billion, including the $103 million PDR booked in the fourth quarter versus an adjusted EBITDA loss of [$239 million] [ph] in 2020. As I laid out at our Investor Day, we expect to drive improvement in our operating cost ratio each year.

13:28 We made significant progress on our operating cost ratio [Technical Difficulty], reflecting a 320 basis points improvement, compared to 2020, but it was above our target for our operating cost ratio, due to higher expenses, including the PDR and the pressure on revenue from risk adjustment. We continue to view 2021 as the peak of inefficiency as we consolidate our systems and processes, and as Mike will discuss, we are taking actions to drive our operating cost ratio meaningfully lower in 2022.

14:07 The 2021 MCR performance in both of our businesses was impacted by the confluence of COVID, unprecedented growth, and the extended 2021 special enrollment period with a 2021 MCR of 101.3%, compared to the 88.7% in 2020. COVID costs in 2021 impacted our MCR by 530 basis points, compared to 400 basis points in 2020.

14:39 I want to spend a minute unpacking the 2021 medical cost ratio in a bit more detail given the magnitude of the variance [Technical Difficulty] to our previous guidance. While we are overall pleased with our book of business, we are disappointed in the operating results and can point to specific areas that drove the variant, most of which we believe are one-time in nature and won't reflect the run rate MCR of our business.

15:08 I will speak to our forward expectations for these items and the implications for our 2022 adjusted EBITDA in a minute. For 2021, the challenges we had in [risk totaling] [ph] accuracy drove 650 basis points of MCR pressure compared to 2020. This was related to our delays in attributing members in part due to our rapid growth in 2021, as well as the impact of the unique 2021 special enrollment period.

15:39 Operational inefficiencies contributed 310 basis points to the year-over-year MCR increase through higher than expected medical costs and other medical cost management issues. Medical costs related to the SEP population and other mixed changes contributed 180 basis points to the increase.

16:00 Finally, there was an incremental 130 basis points of year-over-year COVID costs in our GAAP MCR, resulting in a total COVID contribution to 2021 MCR, up 530 basis points.

16:13 COVID costs in total were a major headwind to our 2021 results with full-year COVID costs [up $208] [ph] million. While COVID costs for care delivered in the fourth quarter were better than our expectations the $56.5 million of COVID cost in the fourth quarter of 2021 for care delivered in prior quarters is an example of the catch up on the backlog in claims I mentioned earlier.

16:39 While not how we manage our business, it is worth noting, if you excluded COVID and other likely one-time impacts on performance such as elevated risk adjustment, 2021 would have been closer to a 90% medical cost ratio, consistent with our expected MCR given the growth and diversification of our book of business.

17:01 Looking at our NeueHealth business, we served over 175,000 patients under value based arrangements at the end of Q4, reflecting strong organic growth and the closing of the Centrum acquisition at the start of Q3 2021. NeueHealth is well-positioned for 2022 through the expansion of our owned clinics, growth of affiliate care partners, and new external revenue streams.

17:26 2021 revenue for our NeueHealth business was $493.2 million, reflecting strong organic growth, two quarters of contribution from the Central Medical Holdings acquisition and the contribution from investment income. The year-to-date revenue represents growth of over 1,200%, compared to the prior year.

17:47 Our NeueHealth business in the fourth quarter experienced a headwind from investment income of approximately $29 million, resulting in full-year investment income of $80 million. Excluding the contribution from investment income, the 2021 revenue growth rate for NeueHealth was over 1,000%. We will continue to grow and expand our NeueHealth footprint in 2022, as well as drive growth through multiple external revenue channels.

18:15 Turning to our balance sheet. As of December 31, 2021, we had approximately $198 million in non-regulated liquidity, including $78 million in highly liquid cash, and investments and $120 million in a passive equity investment classified as short-term. In January, we closed the sale of Series A Preferred Stock, which contributed $750 million in proceeds. The non-regulated liquidity figures does not include $1.7 billion of additional cash and equivalents held by our regulated insurance subsidiaries.

18:50 Based on our 2022 plans, we believe we have sufficient liquidity to meet our near-term liquidity needs and support the continued growth of the business. We are updating our full-year 2022 outlook and we now expect enterprise revenue to be in the range of $6.8 billion to $7.1 billion, above our prior guidance range on external payor growth at NeueHealth and the strong Bright HealthCare membership growth in AEP and OEP, partially offset by a more conservative view on our estimated risk adjustment payable.

19:25 We expect our enterprise medical cost ratio to be above our prior guidance and are forecasting a reported MCR range of 90% to 94%. This upward revision reflects the higher medical cost trends in 2021, offset by the efforts we are taking to improve performance.

19:44 We are also updating our forecasted guidance on adjusted EBITDA for full-year 2022 to a range of a loss of $500 million to $800 million. Included in 2022 guidance, our cost savings actions, we have already taken this year and combined with our higher revenue expectation we expect to outperform the 22% to 23% operating cost ratio outlined at Investor Day.

20:13 We have widened the guidance range for medical cost ratio and adjusted EBITDA to reflect various scenarios for the remainder of the year. On a segment basis, our revenue forecast reflects an estimate of approximately 1 million end of year members for Bright HealthCare consistent with the positive enrollment update we provided in January.

20:35 We are also forecasting full-year 2022 NeueHealth revenue of $2.3 billion with the increase to our NeueHealth forecast, reflecting a modestly higher expected for healthcare contribution, strong external payor growth, and greater visibility on the direct contracting program.

20:51 We now expect approximately 40% of the NeueHealth revenue will be generated from external sources. We are growing the pipeline of opportunities for NeueHealth external revenue, including bringing in new payors and expanding our existing payor relationships.

21:07 CMS recently announced the 2022 participants for the Direct Contracting Program, with NeueHealth named as a participant through our physicians plus organization, participating in six states. We expect to have approximately 50,000 lives in the management in the DCE model, and a total revenue contribution of approximately $700 million.

21:28 We see the direct contracting program and the newly announced ACO reach model as a great long-term opportunity for addressing the Medicare fee-for-service population and believe NeueHealth is well-positioned for success in that program.

21:43 For 2022, we expect to drive a significant improvement in our adjusted EBITDA. We have provided a bridge in the slides posted to our Investor Relations page today to help show the impact of the actions we have taken and key tailwinds that we expect will support our 2022 EBITDA improvement. And Mike will provide further details on each, but first, I'll layout the financial impacts.

22:10 We expect the benefit of increased IFP volume, net of the changes to PMPM revenue expectations to drive $200 million in incremental gross margin and EBITDA benefit year-over-year. We expect the significant progress we have made in our efforts to better manage medical costs, combined with our expectations for COVID expenses relative to what we have included in our planned pricing to contribute $325 million in gross margin and EBITDA benefit.

22:41 We expect our risk adjustment efforts and the business tailwinds for 2022 to drive $175 million benefit to EBITDA. We have also taken targeted actions around operating expenses combined with the 2021 impact of $103 million non-cash PDR to drive an approximately $200 million EBITDA benefit.

23:05 Operating expenses to support the continued growth of the business and other smaller items are expected to be negative to the 2022 adjusted EBITDA bridge by $470 million, but the combined approximately $430 million impact of the items I detailed, results in a bridge to the $650 million loss at the midpoint of our 2022 adjusted EBITDA guidance range.

23:32 Before I turn the call back to Mike, I want to appreciate our amazing Bright Health team across the country. Working together, we are changing healthcare. Additionally, I want to thank our shareholders for your continued support as we build a National Integrated System of Care.

23:47 Now, here's Mike, for additional insight on the strategic efforts we are making to drive better operating performance and improved profitability.

Mike Mikan

23:58 Thank you. As you heard from Cathy, 2021 was a year of both challenges and opportunities for Bright Health Group, and we expect results to be meaningfully better in 2022. Our strategy has always been focused on driving the business to scale, which we reached an important milestone on this year. This level of growth however created challenges for the business, compounded by the unique circumstances of an extended SEP and COVID.

24:29 While important to reflect on those challenges, I wanted to spend a few minutes speaking to the specific actions we have taken, as well as the tailwinds for the business that I believe will position us well for 2022 and beyond. We have taken specific actions against several areas that will impact near-term performance for the majority of our membership and legacy IFP markets.

24:58 In addition, we priced in COVID at 2% across our book for 2022 [Technical Difficulty] to reflect the risk of future COVID-related expenses. We also are focusing on pricing as an important lever in 2023 as we continue our path to profitability.

25:21 Two, unit cost and medical management reduction initiatives. We identified several unit cost and medical management opportunities in 2021 across both our IFP and Medicare Advantage businesses that candidly, we were unable to capitalize on in 2021. However, those efforts are demonstrating significant value in 2022. These medical cost efforts are in addition to the net pricing actions we have taken.

26:00 As we gain scale and optimized our processes, we were able to renegotiate ancillary and pharmacy contracts, reduce out of network rates, optimize existing contract structures, more closely manage high cost cases, and improve our specialty provider network.

26:20 Optimizing the care network is an ongoing process that requires data on our members and volume, which we now have significantly more of each and better systems to provide visibility. Three, risk adjustment actions. Accurate risk adjustment was a challenge due to several structural issues in 2021 as I have discussed.

26:46 However, those challenges drove us to make significant investments in our risk adjustment capabilities. It starts with faster attribution of our members to a larger network of owned and affiliate physicians that have better ability to engage with their members earlier in the year.

27:07 Equally important are the tech and operational investments we have made in suspecting analytics, outreach and engagement teams, and our end-to-end risk adjustment process to ensure we are accurately capturing the risk of the population we manage. We are also working to help members better manage and navigate their care, which we expect will drive better in network trends.

27:35 Four, claims and clinical platform stabilization. As I mentioned in 2021, our growth caused us to out kick our coverage. Not only in the capacity of our fully-aligned provider networks, but on our administrative, operational, and clinical systems as well. This growth was taken place, while we were building or transitioning from numerous vended solutions to Bios, our end-state operating platform.

28:09 As we go into 2022, we have successfully transitioned to our new finance and people systems, 70% of our membership is on our proprietary clinical system, [Panorama] [ph], and all of our new market membership is on our new claims administration platform with the remainder of our IFP membership to migrate on 1/1/2023.

28:35 Having our business on BiOS provides us greater visibility and efficiency. The benefits of which we are already seeing today with faster claims processing times, more accurate payments, industry standard denial rates, and more timely and complete consumer data just to name a few.

28:56 And five, we are addressing talent and cost structure. A high performing team is critical to our ability to improve performance and drive sustainable results. We continue to evolve our team, adding expertise as needed and have taken specific actions to reduce the cost structure, eliminate redundancies, and drive efficiency across the organization.

29:24 While we appreciate the team that got us here, we have made some specific management changes to position us for the next chapter of profitable growth and performance.

29:37 Shifting to the company and industry tailwinds, I wanted to highlight five specific items that alongside the actions we took, we believe will have a demonstrable impact on 2022 performance.

29:52 One, scale and diversification. We achieved solid growth in this year's annual and open enrollment periods, starting 2022 with significant scale at more than 1 million health plan members and 400,000 lives under risk based contracts.

30:12 This scale not only allows us to better manage population risk and reduce volatility, but our density in specific markets such as California, Texas, Florida, and North Carolina allows us to better engage with providers and be a more meaningful portion of their overall business.

30:32 Two, higher retained membership. Inclusive of the impact of SEP, approximately 85% of our IFP membership was new to us in 2021. While new members to start 2022, including new markets account for approximately 55% of our enrollment.

30:55 We also benefit from strong renewal rates with a retention rate of approximately 79% in our mature existing markets. This has numerous benefits to performance, including more data and information on our members to help us better manage the population and accurately capture member risk.

31:17 Three, normalized special enrollment period. The 2021 special enrollment period, while providing us with continued growth to shorter member duration and higher acute care costs for those members all against the backdrop of COVID made it very difficult to engage with this population and accurately capture the risk. We expect a much more normalized SEP this year.

31:51 Four, reduced operational backlog. The operational challenges we saw [Technical Difficulty] like our challenges with risk adjustment, we made significant investments in the team and systems I mentioned and we're far better prepared for the growth [Technical Difficulty].

32:15 And last, five, [Technical Difficulty] pandemic COVID. Finally, while I believe COVID will be with us in some capacity for the foreseeable future, with the [Technical Difficulty] increase in vaccination rates, while cases of COVID may continue the direct COVID costs we expect will be more manageable.

32:45 We also continue to explore ways that we can work with Cigna and have identified several opportunities with work streams and process on these. While we are just a few months into the relationship, we are excited about the potential of our two companies working together and the ways it can help strengthen our business and enhance Bright Health’s capabilities.

33:08 We are looking to the future and are confident that near-term steps that we are taking to improve our performance will optimize the business for long-term success.

33:19 In closing, we remain convicted on our strategy for Bright Health Group and the strength of our Fully Aligned care model in the face of substantial growth and a uniquely challenging year in 2021.

33:37 We are confident that the combination of our Bright Healthcare and NeueHealth businesses are built for where the healthcare industry is going. We are targeted at the growing consumer retail healthcare market and are leaning into serving this market through a fully aligned and integrated care model that combines the financing and delivery of care.

34:04 We are strengthening our foundational capabilities for sustainable and durable results with greater visibility that will drive improved forecasting. As I look to the future, I want to conclude the prepared remarks for why my team and I are so excited about the future.

34:26 We have a scaled and diversified platform that is purpose built to integrate the financing and delivery of care. We have a market model that is flexible to meet local market needs, one that drives differentiation, through our care partner relationships. We're developing a proprietary suite of technology that is specifically built to enable the fully aligned care model.

34:52 And finally, we're seeing both performance and most exciting, external growth, and interest in our NeueHealth business. Whether new external payor contracts that are looking to new help to manage their populations or new programs such as direct contracting, which we believe is at the leading edge of where Medicare is going, NeueHealth is developing a robust pipeline of future opportunities.

35:20 I'd like to thank the more than 3,000 Bright Health employees who are hard at work, executing on our strategic priorities and making healthcare right by working together. I believe we have the team to execute on our model that has built for the future of healthcare.

35:39 Operator, now let's open it up to questions.

Question-and-Answer Session

Operator

35:44 Thank you. [Operator Instructions] Our first question today comes from Lisa Gill from JPMorgan. Please go ahead.

Lisa Gill

36:06 Thanks very for all the detail. I just want to go back to really understand a little bit better what happened between the Investor Day in December, our conference in January and today, where your risk adjustment accruals came in much different, but then expected. So, a few things. One, are you making any changes to the accrual process itself? And then secondly, you did raise price, right, when we think about the individual market, but what gives you confidence that you are able to price correctly as we think about going into 2023?

Mike Mikan

36:44 Hi, Lisa. So, with respect to what changed between the time periods that you referred to is, it's a confluence of factors as you can imagine the different areas that we talked about in terms of challenges are compounding effect, but it's starts with operational limitations. And we were in the – from the beginning of the year with all the growth that we had gotten from 2021, we had to build out more network to coverage from active standpoints loading our [Technical Difficulty] part of the year particularly in the fourth quarter.

37:25 We process somewhere around 40% to 50% of our underlying claim expense during that time period. Obviously, with that amount of clean processing, we didn't have the data or the insights to really understand how we were capturing the risk codes and what other underlying medical trends were we seeing. And so, as that team to fruition through January as we closed out our books, obviously, we determined our estimates and were impacted by an increase in risk of adjustment, as well as claim processing.

37:59 When you look at risk adjustment, unfortunately for us, there were many different factors that impacted us in the year. It had to do with obviously starting with a new member base, 85% of members being new to us in substantial role, but then SEP kicked in and we got new lives and we were late to attribute them to our own medical centers in our affiliate network.

38:27 And so, engaging with them didn't occur until later part in the year, which is too late, which we talked about in Q3. We talked about that in Investor Day and onward. What we didn't really understand was the impact of not having the data from all the claims that we had denied early in the year, and that impacted our understanding of the diagnosis versus the claims that we’re paying.

38:53 So, there are cases, many cases where we have now identified that we paid for certain services, but we don't have the original medical diagnosis because it have been prior to our watch and we can't code for that effectively. So, there are things like that that have been happening – that happened to us in 2021 that we believe [Technical Difficulty] platform, which we made the decision to do. The good news is, all new markets are on a new platform.

39:20 The other good news is, starting in the later part of [Technical Difficulty] with our outside vendor on our legacy system, we were able to build our own team or put our own team into that system, so we can improve performance. So it all comes down to attributing earlier in the year to providers, getting that – giving them the data to engage with those that have higher [chronicity] [ph], and then better data to manage them going forward, and we're starting the year in a much better position than we were obviously in 2021.

40:00 With respect to pricing, as I mentioned, we look to many different initiatives to improve underlying gross margin. Pricing is one lever. Pricing is a consideration for us. We're going to look at markets that we believe we've got opportunity to take pricing up. And then we're also going to look potentially some markets, Lisa that don't necessarily fit our long term plans.

40:31 And so where we can't see differentiation or a path to get, the gross margin contribution we want to, that's a long winded answer, but there's a lot in that to answer that. So, I appreciate the question.

Lisa Gill

40:46 Thanks very much.

Operator

40:50 Our next question comes from Kevin Fischbeck from Bank of America. Your line is open.

Kevin Fischbeck

40:57 Great. Thanks. I guess I wanted to drill two of the issues that I think you cited as, kind of problems in 2021 that should to some degree be addressed in 2022. I guess, first the systems issue, was there any part of the business in 2021 that was on the current system that you're on? And if so, did that perform differently or better than the rest of the business? And then two, your model is about getting people into high performing networks, either third party or through NeueHealth? And is there, it sounds like the rapid growth, kind of meant that you need to kind of pull together a broader network than normal. Is there some way to kind of bifurcate the performance of membership that was kind of more within that normal network that you would have seen versus the membership that, kind of ended up being outside, so we can kind of see and give us some proof points that the core model is performing better?

Mike Mikan

42:02 Yes. With respect to the go forward system, 1/1/2022 was the first time we put new markets on that and we made a specific decision to not migrate other markets to make sure that we were starting a new, and make – that we've had all our kinks worked out in 2022, so we can migrate for 2023. So, we are looking at early activity.

42:27 We're very pleased with our so far performance. And so, we're looking forward to that migration in 2023, but no, we don't really have any other experience on our go forward system other than what we put on it, which is about 30% of our membership today.

42:49 With respect to the performance of – the cares – own care centers and the affiliate network versus the broader curated network, we believe that managing our underlying medical costs in our own care centers as demonstrated with external customers that we've had not just Bright HealthCare that we can provide care at a lower cost.

43:18 The risk adjustment impact to both our owned care centers and our affiliate network was pervasive regardless of whether it was in – the curated network versus our affiliate or owned medical centers, and that skews the results from a gross margin perspective, but underlying medical cost, we see in advantage and we do believe over time, we’re going to see greater engagement and better integration with data with our specialist network, our care partner systems and what have you, and we're going to do a better job of accurate coding with the integrated model.

43:51 Unfortunately, it is – 2021 was a challenge for us for the same reasons I talked about earlier on risk adjustment and that's no different within the Bright HealthCare business versus NeueHealth for Bright HealthCare business. If you look at our external customers, we've seen the proof points that they perform better than the average. And that's what gives us conviction that our model is sound going forward.

Kevin Fischbeck

44:18 Alright, great. Thanks.

Operator

44:22 We now turn to Steve Valiquette from Barclays. Please go ahead.

Eric Glynn

44:28 Hi. This is Eric Glynn on for Steve. So, in January, you gave an update that you had a little over million members at the end of the annual enrollment period and I think you confirmed that today. And the guidance is calling for about 1 million at the end of the year. So, is the current assumption that you'll have like the normal monthly attrition in IFP business, like partially offset by gains in MA throughout the year and is there any assumption baked in Medicaid members that are being redetermined starting in, call it 2Q and then rolling into IP book or is that just pure upside to the guidance? Thanks.

Mike Mikan

45:07 Yes, enrollment, you're right. We're assuming normal attrition. We don't expect the SEP activity that we saw last year. So, that's what gets us to around end of year of approximately a million lives. And we don't have anything in our assumptions for redetermination, it’s – we don't understand the timing yet and how the states would roll it out or what impact it would have in 2021. So, we didn't put anything in our forecast or 2022, sorry.

Cathy Smith

45:35 And I would add to your [rate on] [ph] Medicare Advantage that we do assume in your growth in Medicare Advantage as well.

Eric Glynn

45:46 Okay. Thank you.

Operator

45:50 We now turn to Ricky Goldwasser from Morgan Stanley. Please go ahead.

Unidentified Analyst

45:57 Hi, this is [Michael Ha] [ph] on for Ricky. Thanks for the question. So, in terms of capital position, I know you mentioned, you have sufficient liquidity, but most of the 1.7 billion you mentioned, you can't really touch because of statutory capital reserve.

46:13 So, if I'm looking at your current of liquidity, correctly, if you can confirm on that, you know that 200 million non-regulated [current cash] [ph], which includes short-term investment, you add the 750 million capital raise on top, that's about 950, but you've already used about 150 to pay down credit facility borrowing 200 infused into your regulated insurance entities, that's about 600 million and then you add on 300 million under your current facility, credit facility, that's about 900, is that correct? And I mentioned something and if so, you may have just enough to find a growth through 2023, but how do you view capital position cash burn heading into 2024 and 2025 and with 70% growth, how should think about the balance of investment and [cash contribution] [ph] going forward? Thanks.

Cathy Smith

47:04 Yes. So, good morning, Michael, yes, largely your math is in the right direction. What I would say is, we feel based on our plans for 2022, we've got sufficient liquidity to meet our near-term needs and with our path to breakeven more clear, obviously, that will start to lessen our dependence on capital needs as well. And then growth and mix of the business are going to clearly have a big impact on what that capital needs.

47:31 As you know, we have many levers, we can pull additional cost structure. We can continue to look at regulatory capital quota share arrangement, which we have some of pricing is always the lever, growth is a the lever. And then as Mike mentioned earlier, we can think about potential exits in non-differentiated market.

Operator

48:00 Our next question comes from Jeff Garro from Piper Sandler. Please go ahead.

Jeff Garro

48:08 Yeah, good morning. Thanks for taking the question. I want to talk about the FY 2024 breakeven target. It seems like that now implies a deeper ramp of MCR improvements from FY 2022 to FY 2024. So, what gives you confidence that you can approach your long-term MCR targets for FY 2024? Thanks.

Mike Mikan

48:30 Thanks, Jeff. Yes. I mean, it's, you know scale matters and that drives significant opportunities for us to improve underlying medical costs. We know the community better that we serve, that's going to have better risk coating opportunities and then also just our ability to price to our underlying capabilities.

48:49 So, now that we've got the scale, obviously, we've been in heavy growth mode up until this point, but by strategy, we wanted to get to scale. Obviously, we are holding not to have the magnitude of the challenges we had in 2021, but between scale, knowing the community better ability to capture code, medical cost initiatives by re-contracting the network, underlying medical management capabilities, and then getting on one system.

49:19 So, we have one record for the consumer overall that we can manage the population holistically and help through [peer navigation] [ph]. We believe by those different levers; it's going to be a big contribution to that FY 2024 profitability. I'd also say, our integrated model on NeueHealth, the growth in external business and what have you provides another profit stream for us and another contribution to that driver or that end goal or, I guess next major milestone in 2024 breakeven.

49:54 So, those areas plus NeueHealth gives us confidence that we're on path to get to breakeven adjusted EBITDA for 2024.

Jeff Garro

50:10 Got it. Thanks.

Operator

50:12 We now turn to Justin Lake from Wolfe Research. Your line is open.

Justin Lake

50:19 Thanks. Good morning. Just a few follow-ups here quick. First, Mike, I appreciate the comments on repricing and maybe some market exits. So, you think about that path to 2024, given the repricing could cause you some membership market exit, what do you think the top-line growth is? I assume if moderated, but where do you think, kind of top-line [shakes out] [ph] just from a broad perspective? Do you think it could be flat next year for instance?

Mike Mikan

50:50 Well, you know Justin, I appreciate the question and we are evaluating Jay Matushak, our Interim CEO and his team are evaluating all our markets as we're going into pricing, our underlying cost structure, our care partner networks that we have, and just really how we're positioned for differentiation.

51:12 So, we haven’t made those decisions although we're close to making those decisions. So, I don't want to get ahead of that Justin, but we still believe growth, I mean, we're a growth company. We believe in scale. We believe we'll grow in our core markets at this stage. And so, but you’re not going to see the level of growth that we've shown to get to this point. And then, that's on the Bright HealthCare side.

51:37 We do see growth opportunities, while we consider to be more capital efficient growth with NeueHealth. And we think that's a real differentiator and you've seen that business. We've just put our guidance at [2.3 billion] [ph] potential that we're considering the DCE or ACO reach program that we think is right in-line with our model. Care partner model around physician owned practices.

52:10 So, all of that we believe is going to continue to drive growth, but the key is, we need to drive their profitability. We need to get our underlying cost structure in-line. We need to get to one system, and then we need to drive other growth profitable or capital efficient growth opportunities within NeueHealth and we think that that bodes well for us.

Justin Lake

52:34 Okay. And then Cathy, you mentioned, along the lines of capital that you felt like you had sufficient liquidity for the near-term. Could you just talk about the – when you say near-term, does that get us through at least the end of the year or are you talking about over the next quarter or so?

Cathy Smith

52:56 Oh yeah, no. Through the end of the year, to your point, 12 months or so, that's obviously always what we look at and focus on.

Mike Mikan

53:06 Yeah, I would mention Justin, just, we do, I would just note the levers that Cathy talked about. We're managing the optimized capital. We understand it’s importance. Obviously, 2021 didn't turn out the way we wanted it to, but we've been taking action all along. We didn't just start in January, we've been managing to a better cost structure to improve medical cost management, all of those things in addition to the [quota shares] [ph] that Cathy talked about, potentially exiting non-core markets that have a capital impact in our cost structure.

53:43 We took a strong action to reduce not just forecast cost, but underlying cost and we're going to continue to do that and as we migrate more to one system, we're going to see significant opportunities there, Justin. And that's imminent, that's coming as we get there because we have a ton of redundancies.

54:03 We had to add a lot of cost last year because we had to do a lot of manual processing and we start the year in a much better position. So, for all those reasons, they're going to help contribute hopefully to a better capital position, and then I would just note this as well.

54:21 Entering into the biggest markets in healthcare, Texas, Florida, and what have you has taken a lot of capital. We're in those markets. We've got a strong capital position. So, as we talked about before, once you get to scale, you don't have the capital burn rate that you do leading up to it. So, we also feel favorable about the position there as well.

Justin Lake

54:45 Thanks. And let me just squeeze in one more. The $103 million PDR, can you give us a ballpark estimate of how much of your 2022 revenue premium is associated with that?

Cathy Smith

55:03 Yeah. I guess, Justin, I'm not sure how to answer that question. PDR, you know obviously that PDR is a requirement when you have written and loss contracts, so for 2022, we evaluate in aggregate the entire book. So, all of IFPs versus all of MA, and we have to look at what our expectations are for gross margin versus a limited amount of the operating expenses and that sets up the requirement. So, we actually look at it in aggregate for all of the IFP business versus all of the MA business.

Justin Lake

55:39 My understanding is that you would have to look at that business by business, right? You look to take a loss; you take a PDR and stuff you expect to lose. So, I guess, all I'm asking is, what percentage of your membership of premium you had to take a PDR?

Mike Mikan

55:56 Let us follow-up on that question [specifically] [ph]. We appreciate it, we'll follow-up to you on that Justin.

Justin Lake

56:04 Thanks.

Operator

56:07 Our next question comes from Jason Cassorla from Citi. Please go ahead.

Jason Cassorla

56:14 Great. Thanks for the question. I just wanted to go back to the previous question around [Medicaid determinations] [ph] and I know you noted that there's nothing there in guidance yet, but maybe can you just help describe past experience where individuals have rolled off of Medicaid and you’ve pick them up in your IFP business, and the ability to match payment the [health status] [ph] of those individuals. I'm just trying to understand how the capture of the redeterminations could differ from the 2021 SEP experience around the risk-adjustment capture argument? Thanks.

Mike Mikan

56:42 I think it's best that, maybe I'd answer it in this way, put SEP last year. So, if you look at just typical life events that occurred during the year and enrolling’s come in, we're able to do a really good job in normal run rate to be able to capture the risk and manage the population.

57:00 Obviously with the way SEP occurred last year, where we got a significant influx, capturing the data will pose to be a challenge. So, we would be managing it very closely on how we would pay commissions, how we would design our benefits for those type programs. And we're going to manage it very closely because we don't want to incur the same situation that we dealt with in 2021. So, I think that's the best way I can answer at this point.

Jason Cassorla

57:34 Okay, thanks.

Operator

57:38 We now move to Sarah Conrad from Goldman Sachs. Your line is open.

Unidentified Analyst

57:44 Hi. This is actually [Lindsey on for Nate] [ph]. Thanks for the question. The new MLR guidance implies 900 basis points of improvement in MLR, could you help us bridge from the 2021 MLR to the new guidance for 2022?

Cathy Smith

58:00 Yeah, I'm happy to start and we did provide a slide in our materials that were posted to the IR website. You'll see it in there. Slide 13 provides a pretty good bridge between 2021 and 2022, and Mike walked through each of those pieces as well, but first and foremost, you'll see some gross margin impact of volume and rate for a couple hundred million dollars.

58:25 Some additional medical cost management initiatives that we've already outlined and taken or taking as well as the differences in COVID costs year-over-year is another 325 million, you would see it in our estimates around risk adjustment in there, and then some operating expenses to support the volume offset by the actions that Mike said we'd already taken.

58:49 And then obviously the PDRs in there too in 2021, but doesn't expect to repeat. So, the combination of all of those help us to get year-over-year.

Unidentified Analyst

59:00 Thank you.

Stephen Hagan

59:05 I think last question.

Operator

59:08 Our next question comes from Gary Taylor from Cowen. Please go ahead.

Gary Taylor

59:15 Hi, good morning. Just wanted to ask one more about the liquidity position given you've got a $931 million risk adjustment, accrual, which I believe you have to pay to CMS in 2000 in July. And then so one, I want to confirm that; and two, when you show on Slide 13 that risk adjustment is 175 million good guide from 2022 into 2023, are you suggesting that you'll accrue 175 million less for risk adjustments? So, even though you're making this $900 million payment in July, you ought to have about 750 million of current year accruals that are non-cash during 2022, if that makes sense?

Cathy Smith

60:09 Gary, I don't know that that's exactly the way I think about it. So, we think about risk adjustment as you know, based on every single market. So, a second year market does expect to improve as we understand those numbers better and better. And so that, but then new market, obviously, we have – we start at a higher expectation of a risk transfer based on our physician.

60:31 So I don't know that I would have said that year-over-year percentage goes or the dollars went like, you just said. With regards to liquidity, though, we've contemplated that all in our estimates of capital for the year. And so, when we say that we feel like we've got sufficient liquidity to meet our near term needs, than we’ve obviously already taken that into account.

Mike Mikan

60:54 Yeah. I think the way you were looking at a net-net degradation in terms of the risk payable, we did grow our book of business. So, the risk payable will go up. What we're really talking about is, specific initiatives where we know that we under coded or weren't able to accurately capture the risk that we've got plans for to address that would take our underlying apples-to-apples, risk adjustment down, payable down as a result of those actions and a lot of it is, what I was talking about earlier where we've got, you know we’ve got the data to demonstrate that we provided a service, but we don't have the underlying diagnoses and this year, we're going to capture those a lot earlier because we're already engaged with the membership that we have.

61:41 We've attributed our lives to our care partner network, to our affiliates, and our own centers, and we're already outreaching to them. So, we know we're going to be much better at it this year. So, that's the net improvement year-over-year that we expect and we hope to do more, candidly.

61:59 So, thank you all for you time today. Yeah, go ahead.

Gary Taylor

62:08 Sorry, I was just going to say, one follow-on on that, since ACA risk adjustment is a [zero sum game] [ph], I mean, do you have data from actuarial firms at this point in 2022 that are affirming that how you’re accruing that risk adjustment for 2022? Is it better shape or more accurate? Anything to point to there?

Mike Mikan

62:35 Yes, well, obviously we used actuaries to price our business and we're closing out using our actuarial teams inside and outside team, and then how we're booking going forward based on what we know, and the data that we capture internally. Obviously, we'll get CMS data later in the spring, but we have the data coming through now between what we ended the year at and how we were trending. We take that data, the actuaries look at it and then we bake in initiatives where we've got proof points to show that we can improve, all that has taken into consideration.

63:09 And as Cathy mentioned, part of the increase in guidance, vis-à-vis, the Investor Day Conference, we took a more conservative approach from that time period to now based on what we saw closing out Q4. Of course, we want to be optimistic. We want to improve this, but right now, that's the approach we're taking and it is actuarial supported.

63:31 Thanks for the question. So, with that thanks for [Technical Difficulty] and we look forward to talking to all of you again soon.

Operator

63:40 This concludes today's call. We thank you for joining. You may now disconnect your lines.