Oak Street Health, Inc. (NYSE:OSH) Q1 2022 Earnings Conference Call May 4, 2022 8:00 AM ET
Sarah Cluck - Head, Investor Relations
Mike Pykosz - Chief Executive Officer
Tim Cook - Chief Financial Officer
Conference Call Participants
Lisa Gill - JPMorgan
Adam Ron - Bank of America
Harrison Zhuo - Wolfe Research
Ryan Daniels - William Blair
Jamie Perse - Goldman Sachs
Elizabeth Anderson - Evercore ISI
Richard Close - Canaccord
Jessica Tassan - Piper Sandler
Mike Cyprys - Morgan Stanley
Sarah James - Barclays
Andrew Mok - UBS
David Larsen - BTIG
Good morning. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oak Street Health First Quarter 2022 Earnings Conference Call. All lines have been place on mute to prevent any background noise. [Operator Instructions]
Thank you. I would now like to hand the call over to Sarah Cluck, Head of Investor Relations. Please go ahead.
Good morning and thank you for joining us today. With me today are Mike Pykosz, Chief Executive Officer; and Tim Cook, Chief Financial Officer. Please be advised that today’s conference call is being recorded and that the Oak Street Health press release, webcast link and other-related materials are available on the Investor Relations section of Oak Street Health’s website.
Today’s statements are made as of May 4th, reflect management’s view and expectations at this time and are subject to various risks, uncertainties, and assumptions. In addition to historical information, certain statements made during today’s call are forward-looking statements. Please refer to our 2021 annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission, where you will see a discussion of certain risks, uncertainties and other important factors that could cause the company’s actual results to differ materially from these statements.
Certain statements made during these call includes non-GAAP financial measures. These non-GAAP financial measures are, in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with GAAP. 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.
With that, I will turn the call over to our CEO, Mike Pykosz. Mike?
Thank you, Sarah. And thank you, everyone, for joining us this morning. Joining me on today’s call, in addition to Sarah, Tim Cook, our Chief Financial Officer. I want to first thank our team for the continued dedication and focus on our patients, our communities and our mission. I feel privileged to work with such a dedicated group of individuals and impressed with the stories I hear every day of Oak Street Team members going above and beyond for our patients.
We are pleased with the start of the year and both the positive momentum we feel across our organizational objectives and the operational results from the quarter itself, with performance above the top end of our guidance range for revenue at-risk patients and adjusted EBITDA. There remains a difficult operating environment in healthcare more broadly and is a testament to our team that we were able to continue to drive strong results.
At Oak Street, it’s an exciting time across the organization. We are focused on the programs and services that our patients need to stay healthy and out of the hospital, and that will transform the way care is delivered for older adults over the next decade and beyond. This is a welcome change from the past few years when we often need to react to in the moment COVID driven needs of our patients and communities.
For example, today we are investing in Canopy our proprietary technology platform, using our deep set of patient data provide actual decision support to our care teams through applications that are both easy to use and improve workflow adherence.
A specific example is our technology integration work with RubiconMD. After completing the first phase of the integration of RubiconMD into our referrals module, we have seen an increase in eConsult sale volume over 200% over the last several weeks.
As we complete Phase 2 and Phase 3 of integration, we expect to see an even larger jump in volume. I am confident that the investments we are making today will drive higher quality care and lower costs for the long-term.
We continue to focus on our team, our culture and our mission to rebuild healthcare that shouldn’t be. We believe our deliberate approach to building and reinforcing our culture, combined with our team’s focus on our mission is a key driver of Oak Street success and will continue to be a differentiator.
Today’s operating environments not without the challenges, we are watching the current COVID wave closely, making sure our patients are protected by vaccines and receive therapeutics if they do contract COVID.
There remains a difficult labor market. We continue to navigate this environment without seeing a negative impact on our financial or operational results. We have not and do not expect to experience a wave and opening centers due to labor shortages.
Today, we have not experienced higher labor costs than forecasted coming into the year. We have been able to leverage our culture, mission and the advantage of working at Oak Street and team members.
Inflationary pressures have a different impact on our business than traditional healthcare providers. First, our labor costs at our centers are relatively low on a comparative basis, representing a little over 10% of revenue versus hospital systems and home health companies that are more in the 50% range. So if there are future increase in labor costs, the overall impact on the business will be much less than traditional healthcare providers.
Second, in future years, increases in the cost of healthcare labor will impact Medicare rates, which will increase Medicare benchmarks, and therefore, Oak Street revenue, making Oak Street largely insulated from inflation in the medium- and long-term. If there isn’t a sustained increase in labor costs and healthcare, our revenue arrives alongside the increases in labor costs allowing us to maintain our margin on higher revenue.
Said differently, if the cost of healthcare labor increases across the Board, that will increase the cost of hospitalizations, and therefore, increase the value of the hospitalization we are reducing, increasing the savings we are capturing and more than offsetting any change to our cost structure.
More tactically, at our centers, we continue to see a return to normalcy, with our focus on patient experience, care model execution and making Oak Street the best place to work in health care for our team.
Our average teams are ramping up events in the community allowing us to meet thousands of older adults who can benefit from our care model. And we are bringing back events in our community rooms.
In April, we partner with AARP Wish of a Lifetime program to do events in all of our centers, and next month, we are bringing back open houses for prospective patients in our community rooms across the organization.
We remain hopeful that bringing back the in-center and community based events that were a core part of our marketing approach pre-pandemic will allow us to return our field-based outreach teams to the level of success they achieved pre-pandemic. And we believe we are just scratching the surface on the potential of our AARP partnership.
One of the greatest aspects of being part of Oak Street is the title alignment between our mission, the impact we make and our financial performance. We make an impact by providing meaningfully higher quality care and unmatched patient experience to growing number of older adults.
We recently published our first ever social impact report, detailing out the impact we make our patients, our communities and the healthcare system. I am incredibly proud of the impact our teams have made. The full report can be found on our website. And as we continue to make a greater and greater impact for providing high quality care to an increasing number of patients and communities will continue to drive strong financial performance.
We are pleased with the impact we have made and the resulting financial performance so far in 2022. In the first quarter, we generated record revenue of $513.8 million in the quarter, exceeding the high end of guidance and representing 73% growth compared to Q1 2021.
Our revenue growth continues to be driven by our organic B2C marketing approach. This includes both central channels, such as digital marketing and our core community-based outreach team. We also opened 11 additional centers, including our first centers in Arizona and remain on pace to open 40 centers in 2022, bring our total at the end of the year 269 centers.
Medical claims expenses have trended in line with our expectations coming into the year. Cost of care, which includes care team labor, marketing and corporate costs are all in line with expectations. Higher than projected revenue combined with costs in line with original projections, resulting in adjusted EBITDA loss of $42.4 million for the quarter, which is favorable to the top end of our Q1 guidance. Tim will cover the specifics around medical costs and other trends shortly.
Taking a step back, we share projected center ramps for 2022 by cohort earlier this year, most recently at our Investor Day in March. Continual performance along with these ramps creates an outstanding financial return on the capital invested in new center development. Our guidance this year is based on center level performance within that range.
Performing favorably to our guidance for the first quarter means we are on our way to achieving the center level performance we set out. By continuing to level performance, just the 169 centers we will open by the end of this year will generate over $1 billion of EBITDA when they are scale.
We are pleased with our performance in the first quarter and what it means for our center level results. We are optimistic about the investments we are making to continue to improve our platform and we are excited to continue the journey to transform healthcare.
Now, I will turn it over to Tim to cover some more details regarding our financial performance in the first quarter.
Thank you, Mike. Good morning, everyone. As Mike shared, we were pleased with our first quarter, as we delivered results above the high end of the guidance we provided in February for at-risk patients, revenue and adjusted EBITDA, and at the high end of the range for centers.
In terms of membership, our at-risk patient base, the key driver of our financial performance grew by 64% year-over-year to 224,000 patients, driven by our B2C marketing model, the introduction of direct contracting in Q2 2021 and growth in number of centers.
At the end of the first quarter, we operated 140 centers and increase of 11 centers compared to December 31, 2021, and representing growth of 54 centers or 63% versus the 86 we operated at the end of the first quarter of 2021.
Capitated revenue of $506.1 million grew 74% year-over-year, driven by growth in our at-risk patient base, excluding the favorable benefit of prior period development early into Q1 2021, Capitated revenue grew 76% year-over-year. Total revenue grew 73% year-over-year to $513.8 million.
Our medical claims expense for the first quarter 2022 of $379.4 million, representing growth of 90% compared to first quarter 2021. When adjusting for prior period medical claims expense related to Q1 2021 recorded in the first half of 2021, medical claims expense grew approximately 75% year-over-year, which is 100 basis points slower than our comparable Capitated revenue growth over the same period.
Recall this year-over-year comparison includes direct contracting, which is reflected in our first quarter 2022 results, but not in our first quarter 2021 results as the program went live on April 1, 2021. As we have previously described, direct contracting is higher per member per month medical costs relative to its per member per month revenue compared to Medicare Advantage and therefore skews the year-over-year comparison.
Adjusting Capitated revenue and medical claims expense for the prior period effects I just mentioned, as well as adjusting Q1 2022 for the direct contracting program, our Capitated revenue growth rate was 350 basis points greater than our medical claims expense growth rate in the first quarter on a year-over-year basis.
I want to briefly comment on the key headwinds we experienced in 2021 related to medical costs, direct COVID costs, non-acute utilization and new patient economics. We estimated that COVID costs in Q1 2022 were approximately $10 million, which is comparable to our Q1 2021 direct COVID costs. We estimate we incurred $40 million in total COVID costs in 2021 based upon claims received through March. It is too early to predict what COVID costs will be in 2022 given uncertainty around local prevention strategies and emerging variants.
December 2021 and January 2022 represented some of the highest COVID related hospitalization levels we have experienced during the entire pandemic. However, these hospitalization levels decreased dramatically in February and March to some of the lowest levels we have experienced.
As we stated in our Q4 call, the non-acute utilization increase we experienced in the spring of 2021 dissipated as 2021 year on. We estimate our non-acute utilization was within a historically normal range in Q1 2022 as it was in Q4 of 2021.
Finally, for new patient economics, it means early given the number of new patients we are caring for today, relative to the total new patients we expect to add during the year. Early indicators are that we will not experience the same level of revenue degradation we did in 2021 on new patients, but we do not expect overall new patient economics to return to 2019 levels this year, as was assumed in our guidance.
Our cost of care excluding depreciation and amortization was $95.2 million for the first quarter, an increase of 58% versus the prior year, driven by growth in the number of centers we operate, accordingly the number of team members supporting are significantly larger patient base.
Sales and marketing expense was $33.8 million during the first quarter, representing an increase of 40% year-over-year, as we continue to invest in this area to support patient growth and a much larger footprint of centers.
Corporate, general and administrative expense was $88.7 million in the first quarter, an increase of 21% year-over-year. Majority of this year-over-year increase is related to an increase in headcount to support our growth.
Stock-based compensation expense included in corporate, general and administrative expense represented $38.2 million in the first quarter 2022, compared to $41.2 million in the first quarter 2021. Excluding stock-based compensation, corporate, general and administrative expense grew 54% year-over-year. We decreased our corporate, general and administrative expense excluding stock-based compensation as a percent of total revenue by approximately 90 basis points in Q1 2022 compared to Q1 2021.
I will now discuss three non-GAAP metrics that we find useful when evaluating our financial performance. Patient contribution which we defined as Capitated revenue less medical claims expense grew 38% year-over-year to $126.6 -- $126.7 million during the first quarter. Excluding the impact of prior period revenue and medical costs related to Q1 2021, patient contribution grew approximately 77% year-over-year.
Platform contribution, which we define as total revenue plus the sum of medical claim expense and cost of care excluding depreciation and amortization was $39.8 million, an increase of 8% year-over-year. Excluding the impact of prior period revenue and medical costs related to Q1 2021, platform contribution grew approximately 140% year-over-year.
As the individual center matures, we expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers, as well as improving our per patient economics over time.
Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction offering-related costs, litigation costs and stock-based compensation, excluding other income to net loss was a loss of $42.4 million in the first quarter of 2022, compared to a loss of $17.4 million in the first quarter of 2021.
We finished the first quarter with a strong balance sheet and liquidity position. As of March 31st, we held approximately $660 million in cash and marketable securities. As discussed in prior calls, we expect our liquidity position will support our continued growth initiatives, primarily our de novo center expansion.
Cash used by operating activities was $91 million in the first quarter of 2022. Our capital expenditures were $20 million for the quarter, both in line with our expectations for the quarter and the year, and our ability to fund the growth of the business in line with the center growth we previously outlined.
Now I will provide an update to our 2022 financial outlook. We are reiterating our full year 2022 guidance across all key metrics and for the second quarter of 2021 we are forecasting revenue in the range of $517.5 million to $522.5 million and an adjusted EBITDA loss of $62.5 million to $67.5 million.
We anticipate having 144 to 145 centers and an at-risk patient count of 131,500 to 132,500, including direct contracting patients at June 30, 2022.
Regarding the shape of our full year guidance, I would note that we expect around two-thirds of our remaining centers in 2022 to open in Q3. We historically have seen greater new patient growth just in terms of the shared number of patients in Q3 and Q4, due to seasonal trends such as weather and the annual enrollment process.
In closing, we remain optimistic about the momentum and the underlying trends we are seeing in the business.
With that, we will now open the call to questions. Operator?
Thank you. [Operator Instructions] Our first question comes from the line of Lisa Gill from JPMorgan. Your line is open.
Hi. Good morning and thanks for all the detail. Mike, I just really want to go back to you know what we saw in the quarter around MLR and then what you are talking about going forward. So, it sounds like things are starting to normalize, talking about Omicron here at the beginning of the year, like, many of the other managed care companies, but as we think about trends going forward, maybe just give us some color and I know you feel like things have gotten more boring and normalized. But anything that you would call out as we think about trends going into the second quarter?
Lisa, appreciate the question. I think from our perspective, our company exists to take better care of older adults, to improve the quality of care and lower acute hospitalizations, and therefore, save costs. And obviously, over the last two years the kind of ebbs and flows of the pandemic and some of the kind of secondary implications of that have kind of had a big impact on our third-party medical costs.
And what we are seeing today, and I think, what we are excited about knock on wood for the remainder of this year and beyond is that, we are kind of really back to our care model and the quality of care we are providing our patients driving reduced -- reduction in hospital admissions, and therefore, driving savings that’s driving our MLR.
And so, I certainly think, January, as we talked about had a high amount of COVID cost due to Omicron that very -- dropped very quickly into February, March. And again, now we are feeling like our performance is really being driven by our care model efficacy and that’s always going to be a focus of your health and always something we want to control.
So, we think we are back to a place of kind of really driving that cost performance and more predictability around that, similar to what we saw pre-pandemic, and obviously, there can be another variant and that could change things, but at least right now it feels like a much more normal time and that should drive more normal performance on the MLR front.
And then, just as we think about the sales and marketing aspect of that, you did talk about more of a normalized, people coming back to the community, coming into your centers. Your sales and marketing expense was better than what we had modeled. I know last night you told me that it was in line with your expectations. But do you think that as people come back in, you are going to have more of an opportunity to leverage some of your costs as we move throughout the year?
Yeah. Lisa, I think, our costs from a sales and marketing respect are really kind of two pieces. One and largest chunk of that is the labor costs for our outreach executives in our centers. So there is a number of key members, think about them as a cross between a community health worker and a salesperson at all of our centers, whose job it is to be in the community, meeting older adults and helping them become patients.
And so that cost is relatively consistent month-over-month, quarter-over-quarter, and obviously, rises in proportion to the number of centers we have. And I think that’s the cost we hope to leverage more effectively, as we get back in the community, they are meeting more people, their cost doesn’t go up a whole lot, they add a lot more patients, which can give us more leverage. So I think we are pretty excited about the opportunity as the year goes on.
The other part of our cost is more marketing expense, I think, digital advertising, things of that nature, commercials, we do also that a lot and a little television, and that actually we did lower a bit in January, just because of the kind of magnitude the Omicron wave and just even things like staffing out, say, things of that nature.
That might be a little bit light, one of a little bit lighter on market that reflect. Although, again, I think that, we do expect it to rise over the course of the year in proportion with the number of centers. But again, our goal is to really better leverage the kind of community sales force to drive more patients and I think that’s a big opportunity for us.
Great. Well, thanks for the comment and congrats on the first quarter.
Our next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.
Hey. Thanks. This is Adam Ron on for Kevin. Going to the membership guidance for the full year and I guess now that you have reiterated it, when you initially guide it to that membership, at the beginning of the year, did you assume a relatively normal ability to run in-person events? You said COVID was deteriorating -- the levels are deteriorating exiting March and so if it were to continue at these levels, would that be upside as you are able to do more in-person events. And at the same time the upper end of the guidance was based on cohort performance from 2019 before direct contracting and since the largest input into ramping a centers, filling capacity and now that you have a lot more ability to add at-risk patients with direct contracting, just wondering how those two dynamics would play out as if COVID levels were to persist at the level.
Yeah. We created our guidance on membership and similar to what we reiterated in our guidance this quarter. We didn’t -- we have not baked in or assumed a bump in our outreach performance driven by in-center events, I think, in data center events. I think we are hopeful that that can occur. But obviously, there’s been so many ebbs and flows across the last couple of years that we don’t want to rely on it in our numbers.
And number two is, it’s always going to take time to get back to where we were in 2019. There’s both getting back on the community completing the events, there is getting older adults back to, getting used to meeting in-person, which obviously is have a different rates in different parts of the country.
Then once you are meeting people, there’s forming relationships which take time, getting them try visits again and the move on to risk roster. So it is a process even if community events were at the exact same place they were in 2019. Today, it would be a month before we saw that flow-through at our at-risk rosters.
And so, again, we are hopeful that as the year progresses, we kind of see the benefits of that, not baked into our numbers. And it may be a situation where we really don’t see the benefits for a couple of periods out, it’s when they occur. That’s kind of the first part around the -- how we thought about kind of the return to normalcy and our guidance.
On the second question, we did not actually look at 2019 performance as the -- across the board for centers as the basis of kind of the top end of the range we shared at Investor Day on our center ramps.
We actually looked at 2019 level forums across just two dimensions, one being COVID, which obviously, when I think performance in COVID was $0 of COVID cost. So I think we know at this point of the year, we are not going to see $0 of COVID cost, but our hope is that it continues to remain well, like, it is today versus where it was in January.
Number two, the other thing we looked at, that was really impacted by COVID last year was our economics on new patients and we -- we have talked about the kind of patient contribution was very different in 2021 than had been historically on new patients. And we believe that was driven by a variety of pandemic-related factors impacting what the revenue cost of those patients.
And so we did assume kind of in the top end of that range, that that was back to kind of a more of a steady normal state. And so those -- so it wasn’t full 2019 level performance as the basis for the top end of the range, just I think kind of those two pandemic-related measures and everything else was driven off of kind of the current performance and trigger the current guidance performance.
Great. Appreciate it.
Our next question comes from the line of Justin Lake from Wolfe Research. Your line is open.
Hi. This is Harrison on for Justin. Maybe if we could just get an update on in terms of DC membership, just what that’s trending like? And maybe what you expect for that to be within the membership composition by, call, at year end or end of 2023? I guess we are just a little curious why more of the fee-for-service isn’t converting over. I think it was our understanding that as some of these other CMI payment models kind of sunset, there would be more opportunities to align under DC. Just want to get the latest on that? Thanks.
Harrison, it’s Tim. Thanks for the question. On direct contracting, I think, we have described this once or twice. We are excited about the program even with the changes made as part of the transition to ACO reach. The challenge that we have had in direct contracting is related to the attribution logic that CMS uses for patients that are going to be voluntarily aligned.
And so our organization is different than many provider -- many other healthcare providers that are participating the program, because we are growing very rapidly in new markets and bring in new providers to Oak Street. When those new providers join Oak Street, by and large, they do not bring a patient panel with them. So the net patients we are adding to the program are really voluntarily aligned by and large.
And what happens within the logic of direct contracting is that patients, when they come in their voluntary line, CMS checks that, see whether that patients can be claimed aligned to any participant in other CMS programs, particularly the ACO programs like MSSP.
We don’t have visibility to know when a patient walks into an Oak Street center whether or not that patient is aligned to an ACO and I can promise you that no patient knows whether or not he or she is aligned with ACO.
So that is where we have had a challenge which is, we have had great success as patients coming to Oak Street, they join our platform, become part of our program, signing those forums and aligning to Oak Street. The problem is that when we ultimately see who flows through from CMS, that number ends up being much lower than we would have originally thought when the program started, because it’s attribution logic.
Now, as we fast forward over the course of the next couple of years and we continue to care for those patients, at some point, those patients will be claimed aligned to Oak Street and that will be a tailwind to growth. But that’s going to take at least a year, if not two years for us to represent the plurality of that patient’s claims, and therefore, some of the claims line. So that has been a challenge.
So, I’d say, growth has been at the lower end of the range that we had outlined last year that we had said 2,000 to 3,000 patients per quarter to more than the lower end of that just because of this dynamic where it’s been more pronounced than we had expected. And again, at some point that will reverse a bit as the patients we have added last year that weren’t able to be voluntary line becomes claimed line, but that’s just going to take time.
Got it. It’s really helpful. And then, maybe really quickly just on in terms of the guidance, kind of maintain it for the full year. I think you would beat the street by maybe $7 million this quarter and then you have got it maybe $7 million below. So maybe just for the back half, is there something we are not contemplating in our numbers. Is there maybe some shred costs with the centers that you are no longer opening this year that kind of land in the back half that drag a little bit? I think that was previously sighs around $5 million. I just want to make sure we are not missing anything here?
Yes. Harrison, this -- I apologize. I am not familiar with your specific assumptions. But I know that I think what you are describing is probably true for a number of others. And I’d say, the biggest thing is perhaps just the assumptions around the pace of new center openings over the course of 2022.
I think generally speaking Oak Street had a relatively evenly distributed across the year, where we obviously have 11 in Q1, we have got a 4 to 5 in q2, which leaves roughly 20 -- over -- more than half 24 in the second half of the year.
And just generally speaking, what that shape would typically look like is typically speaking Q2 and Q3 would be the busiest months from new center opening perspective. Q1 would be busier than Q4. This year was a little bit different.
We came into the year with the expectation of opening 70. We obviously had a number of centers ready for Q1 in order to achieve that pace. And as we got that, as January, February, we had centers ready to open. We had the teams hired. It didn’t make sense to defer opening because they were ready to go. In a more typical year, if we were -- if we had gone to the year expecting 40, I would expect it more in Q2 and less in Q1.
So I say all that because I think about the shape. I think generally speaking, the full year, I think, the history is aligned with our full year guidance, that composition across quarters looks a little different. My guess is Q2 folks were a little more conservative.
My assumption, again, this is an outside looking in is that, that is driven by a same center account growth in Q2 and Q3 and then Q4 approach are probably better than we are from an EBITDA perspective. When you net all that out, it nets to zero, right, because from an annual perspective, we are in the same place. But my sense is that’s probably what the driver is.
Okay. That’s helpful. Appreciate it. Thanks.
Our next question comes from the line of Ryan Daniels from William Blair. Your line is open.
Yeah, guys. Good morning. Thanks for taking the questions. A couple on the growth outlook, Mike, very helpful commentary on the labor front, obviously, key concern, big issue for healthcare, so good to hear that it’s not impacting you on the cost front. But what’s unique about your growth model is that you are not acquiring practices, you are not dependent on trying to find affiliates, you kind of control your own growth with center openings. But that does mean you are hiring a lot. So can you just comment on that portion of the growth and are you having any challenges finding the right staff, whether it’s outreach coordinators or clinicians as you continue your growth pattern? Thanks.
Thanks, Ryan, I appreciate the question. And I think you are right, I think, being of an organization, I mean, we are hiring great team members for all of our new center openings. We have not seen any issues so far this year on having to delay centers or not having them, staff where they need to be open. We don’t anticipate those issues going forward.
I think what it really net down to for us is, as I mentioned before, the mission and the culture of Oak Street Health and the atmosphere we have creating for our teams. So we have had a lot of success bringing people into our model, whether that be community outreach associates or providers or nurses or metaphors and everything in between, who really believed in our model and believe in the way we are back to the healthcare, get to know our culture, we have a great team now that does a great job of providing referrals of their network to join Oak Street and that’s our favorite way to recruit and hire.
And so, I think, we have been able to leverage those aspects of what we do. We don’t have to leverage the fact that it’s from a healthcare professional, we can provide a lot more consistency in hours and days and week than, say, a hospital system could.
So, again, I think, we need to be able to really navigate those things to-date and I think you will expect to for the rest of the year. I mean, certainly it’s hard to hire people and a lot of different roles than it was five years or seven years ago, but again, it’s something that we have been able to successfully navigate through so far and we expect you to do so.
Great. Appreciate that. And then maybe one for Tim, I think an important part of the thesis is just the implied EBITDA at scale of $1 billion just in the current footprint at year end. I wonder if you could just remind us what some of the key considerations aren’t getting there, meaning how long would it take for that footprint to scale to that level and any assumptions that could move the needle one way or the other to get you above or below that $1 billion? Thanks.
Thanks, Ryan. Yeah. I’d say it’s -- first it’s just an assumption extra -- it is an extrapolation of the center results that we outlined at our Investor Day and then earlier this year at the JPMorgan Conference as focusing where we have 10 centers this year that we expect to generate over $8 million of upper margins.
So if you take the centers that we expect to open by the end of the year and use it as a proxy, and then apply some normalized level sales and marketing and G&A to that, that’s how you arrive at the $1 billion, Ryan.
So from today, I’d say based upon that performance, you are talking about six years to seven years. Our goal, obviously, is to shorten that timeframe to the best of our ability. But I think that that’s what’s applied in the logic.
Our next question comes from the line of Jamie Perse from Goldman Sachs. Your line is open.
Hey. Good morning, guys. I wanted to follow up on some questions around MLR experience in the quarter and I am looking at this versus 2019 and 2018 trends, things have obviously changed since then just in terms of COVID and then you patient economics, I was wondering if you could help us bridge and how to think about the rest of the year. So your 800 or so basis points above where you were in 2019? How should we think about that spread progressing throughout the rest of the year as COVID costs, hopefully, come down and you get a handle on some of these non-acute costs and any comments on how RubiconMD integration helps with that?
Hey, Jamie. It’s Tim. I will start and Mike feel free to jump in if you would like. But I’d say, there’s a couple of key drivers that have changed since Q1 of 2019. The first is just direct contracting, as I described, and direct contracting has a higher MLR than our MA business. And it’s a relatively meaningful part of our business in Q1 of 2022 and it was not a part -- not any part of the business in Q1 of 2019, obviously. So that’s one of the drivers.
Second is the COVID costs that I mentioned, that’s $10 million in Q1, that we didn’t, I think, Q1 of 2022, excuse me, that we didn’t have in Q1 of 2019. That’s roughly 2% right there. Those are the two largest drivers.
And I’d say that the last thing is, as we describe patient economics improve, longer patients are with Oak Street. We think about the center growth we have experienced in the last two years and there have been correspondingly the number of new patients we have as a percent of our total, that number is grown a lot.
That is going to all else equal blend up the medical loss ratio. It doesn’t change your expectations where those patients will be when they have been with us for the same period of time. But the weighted average tenure of our patients just like the weighted average tenure of our centers is less today than it was in Q1 of 2019.
Okay. That’s helpful. And then just a question on cash flow from operations negative $91 million in the quarter, you said that was in line with your expectations and looks like there was development around accounts receivable. Just can you walk us through that specific dynamic and how we should be thinking about modeling cash flow for the rest of the year?
Yeah. So the -- it was within our expectation. I’d say, Q1, we think about Q1 cash flow there -- our Q1 operating cash flow. There’s a few drivers. One is, I just say, depending on what health plan settle with us, that will drive the working capital balances at the end of one -- at any given period.
Depending upon the plan, we settle more or less frequently, but to the extent that you settle on the last week in March versus the first week in April, that can change obviously, what you reflect on the balance sheet.
And for folks, just for folks recollection. For over half our plans, the way our contracts work is we are paid an upfront payment that is meant to help defray some of the costs that we incur to support our care model, which are obviously more expensive than what you would receive in a more -- in a fee-for-service environment.
And then we settle with plans on a monthly or quarterly basis depending upon the plan where they true up that upfront payment to what we are actually owed. And because of our performance, typically speaking, we are owed a lot more than what was paid up front.
Until we have actually settled with the plan for that period, we carry the full amount of the revenue and ARR and we carry the full claim -- medical claims expense in our liability for unpaid claims. So you are going to see that bill. I mentioned that only because, again, depending upon the timing of the settlements, we saw some settlements slip into Q2 that would have otherwise closed in Q1, that balance probably looks higher than it would have.
The other thing I’d mentioned is, we accrue for what we expect our risk scores to be in our patients as folks know risk scores adjusted on an annual basis. But you don’t have an update until the midyear sweeps over the course of the summer. Based upon all the work that we do to care for our patients, we document about 85% of all the codes associated with our patients.
So, we have a very good understanding of where our risk score will ultimately be once risk scores are settled and they take this year’s reimbursement won’t be settled until next summer, right, summer of 2023, just the way the risk adjustment process works.
We are making an estimate today for what that risk score will ultimately be and will be paid on. And that number is highest in the first half of the year, because we are waiting for that midyear settlement where it trues up the payment for the part of the year that has transpired.
So, said another way, in -- from the first two quarters that balance will grow more significantly than it would in Q3 and Q4. So what you are seeing in operating cash flow in Q1, which I think the question is, the combination of the timing of settlements as well as this risk adjustment.
The last thing is direct contracting, which plays a little bit in with settlements. Direct contracting in settlements annual basis which actually -- so the least preferable of all the contracting settlement timelines, so that the combination of those three things lend to operating cash flow being where you outlined. I’d say, that’s time -- by and large, timing earlier from our perspective and that’s why I mentioned it was expected.
Okay. Thanks for the color.
Our next question comes from the line of Elizabeth Anderson from Evercore ISI. You are line is open.
Hi, guys. Thanks so much for the questions today. I think I heard you say earlier in the call that eConsult are up about 200% in the last couple of weeks. I guess, I would be curious sort of how do you think about the penetration of RubiconMD into your base versus sort of where you expect it to be over the longer term just as sort of we think about that ability to help with the cost line there? Thanks.
Yeah. Thanks for the question. And we are -- the reason if you go back to when first announced the acquisition, that we felt it was important to purchase RubiconMD versus just partner with them is we really believe that making it kind of easy and embedded in the workflows for our provider teams would allow us to get the full benefit of what the potential of eConsult are really drive better patient care, quality, lower cost and we are one of kind of our three phases of kind of the first set of integrations we are doing.
And the good news is to become like our EV for our team is now -- you can now kind of choose the eConsult option within our broader referral model. You don’t have to go to a separate portal to do it and again, that will make it easier. So we have seen a huge percentage almost all of our providers which do one or the couples eConsults and try it and get a sense to understand why it works.
We had some new early adopters who are doing kind of a much larger portion of their are kind eligible for eConsult. So, we like the direction we are moving because, again, it’s both the technology and also kind of the culture of the buying and understanding of our provider teams around the value of it.
I think when we get to Phase 2 and Phase 3 of the tech integration we are going to have across the year, that will keep making easier and easier and do kind of more and more of preparing the eConsult and sending it out, doing more and more of that automatically, which I think would drive higher and higher adoption of the program.
And so, as I said on the call, I think you have two or three I think more that we will get by the end of the year and eConsult kind of sell volume from where we are today and we are already obviously way up from where we were before we made the acquisition.
So, we feel like -- where we wanted to be kind of in realizing our underwriting case and kind of getting into a place where this is just core part and the vast majority of all referrals are leveraging eConsult.
And again, if we are leveraging eConsult, that means we are going to save cost because some percentage of the referrals we would have made, we find out we don’t need to make because an expert, specialists kind of reaffirm the care plan or helps adjust without having to actually see the specialist provide better patient experience to be they don’t have to go to the specialist in notate co-pays. And I think it also benefits of just getting faster and better coordinated specialist opinions integrated into our model.
So, again, we are really excited for it. I don’t think you are seeing much any cost impact in Q1 so far from it. But, again, that’s one of the things that we have obviously, you made a general investment in the company and even bigger -- a very time intensive investment in the integration work and we are excited to see the results play out kind of end of this year and then into next year.
Got it. That’s super helpful. And then how do we think about the G&A spend either on a percent or basis or total sort of scaling across the year given what you said about the pacing of center openings?
Sorry, Elizabeth, was that just the amount of G&A we expect over the year, that I will try and follow center openings, for sure?
Yeah. Yes. Yeah.
Yeah. I’d say there -- as I think we mentioned on that the call several weeks ago. One is with their investments that we have made, that we are already going to make coming into the year that were to support…
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Yes. I am here. Our next question comes from the line of Richard Close from Canaccord. You are line is open.
Yeah. Thanks for the questions guys. Can you hear me okay?
We can. Sorry about that, our lines dropped. I spend a few minutes on hold trying to dial back in, so.
Okay. Great. Thanks for the questions. Question for you, Tim, maybe, so good progress, I guess, on COVID and non-acute care trends. Can you talk a little bit about geography, is there any geographic comments that you can talk about or are you seeing those trends over the whole center base?
Richard, I’d say, by and large, from a financial performance perspective, we are seeing trends across the whole business. I’d say, generally speaking, COVID has been more of a factor in the Northern geographies of our business than the Southern, but by and large, I’d say, it’s been pretty consistent.
Growth has been better in Southern geographies only, because they have been more open and the weather is just frankly better. But other than that, I’d say everything is pretty normal and pretty consistent across the business.
Okay. That’s helpful. And maybe one for Mike, a follow-up to Ryan’s question on labor, obviously, health systems are having a real difficult time on the labor front. And I am just curious whether you guys may be benefiting it’s easier to hire people for organizations like [Technical Difficulty]
Excuse me, this is operator. This speaker suddenly got disconnected again, please remain on the line. You are conference will resume shortly. Our next question comes from the line of Jessica Tassan from Piper Sandler. You are line is open.
Thank you. So, I just want to ask one on the 2017 cohort or the year five centers in 2022. How long post exclusivity, I guess, does it take for those centers to catch up with their peers in that particular year or like how long will it take for the 2017 centers to match the historical performance of other cohorts?
Thanks, Jess. Appreciate the question. Two things keep in mind on the 2017 cohort. One, I believe it’s five centers, and so, it’s actually a very small number of centers, especially given the whole number of centers we have today. And so, that’s why kind of the uniqueness of a couple of exclusive centers can really kind of move the average in the whole cohort.
And when you think about catching up to results, it’s really more of a cumulative membership catch-up. And so if you are a couple of years behind in growth, you are going to continue to be a couple of years behind until you get to kind of more the near capacity level and then you will catch up.
So I would think about it more of a -- they will remain behind every year, but they will have improvement longer than a more normal center, right? So, they will have a larger growth in kind of the latter years of the center from a contribution perspective as they start to catch up on membership, because at some point, your capacity is going to start -- started slowing down their membership growth at the recent capacity and these centers are going to reach capacity a couple of years later. Therefore, they will get to the same economics long-term just take a little longer for them to get there.
That actually makes a lot of sense. And then I guess just, I think, the consistency repeatability of the model is one of our favorite things about Oak Street, which is if you have to isolate kind of one factor that does vary the most between centers or between markets. What would it be? Just like marketing responsiveness, specialty care management, chronic condition prevalence, what is it? And how do you guys manage it?
Yeah. I think the probably pick two. I think one kind of -- the kind of density of the market, the types of community organizations that will obviously impact your approach from a community average perspective and so some of the communities -- your dense urban markets in New York to Chicago those types of places.
Obviously, you are working with large senior living buildings. You are working with dense community groups and some of your other markets that are more your Rockford to your Fort Wayne. It’s just -- so it’s a more spread out community if you are looking for kind of more hyper local groups, things of that nature. So I think there’s a kind of a difference in how the team on the ground needs to kind of figure out who are the key aggregates for older adults, who are the groups to work with.
And look, we have had a lot of success in the Rockford and the Fort Wayne. We have had a lot of successes in the Chicago. So, I don’t know if I said what is definitely better than the other. It’s just kind of finding the right way to get in front of older adults and when we get in front of older adults, we are very good at helping them understand why Oak Street Health is a great place for them to get their care.
And then the second one, I think, some of the aspects, especially on like post-acute care and some of those that aspect in Medicare, where the most geographic variation is kind of post-acute cost and post-acute kind of practice patterns.
And so that’s one, I think, that as we go to market, we really try to figure out what are the referral patterns for discharge coordinated at hospitals, what are the preferred skilled nursing facilities, those types of things because that’s the place where you can see a lot of variation, not necessarily by patient need, but just by kind of patterns in the community.
Got it. Thank you.
Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. You are line is open.
Hey, guys. This is Mike on for Ricky. So, a question on incidental COVID admissions, so last week, you mentioned seeing higher incidental COVID admissions, which show unfavorable PPD. Wondering, did you see this incurrence where just a greater percentage of your admissions turned out to be COVID and it was initially tagged as non-COVID? Curious on your visibility and you didn’t disclose TBD. So, I was wondering if it was an unfavorable guy or could this potentially be a negative item come in 2Q?
Hey, Mike. It’s Tim. Thanks for the question. We have been experiencing that headwind related to COVID being a secondary diagnosis or even a tertiary diagnosis for hospital admissions. It has been relatively small for us. It has stayed small. So we have -- we had no material prior period development in Q1. There’s always some truing up investments, of course, but nothing material.
As it pertains to this specific issue, I’d say, our Q4 or 2021 med cost accruals are still in line with all the data that we have received since the end of the year. And I don’t expect that this issue to be create that the issue that you may have mentioned to create any incremental headwinds to what we have already reported. That’s been relatively prevalent in the market over the course of the time that incremental payment to help hospitals has been around.
Got it. And just one more question. With your AARP partnership, I think Mike mentioned, we are just scratching the surface of what’s possible. I fully understand the power of marketing, the co-branding. But could you talk more specifically about how you view the membership opportunity, like how should we think about is benefiting membership growth near-term and long-term? And how does the partnership work outside of the co-branding element? How should we think about the economics supplements from as well?
Yeah. I mean I think when you think about the AARP, it’s the most trusted brand for older adults. The reach of the brand is massive. I believe that the AARP kind of magazines are the number one and number two most distributed magazines in the country, just as an example of the scale they have. And so, I think, from our perspective, there’s just a large number of ways that we can tap into the scale and the trust and the breadth of what they do.
And when we come back to what drives growth at Oak Street, right? Again, we are not buying or partnering with practices as our source of growth. We are a consumer organization where we are educating older adults of why they can get a better patient experience and better quality care at Oak Street.
And what we find is if we get in front of the people, we get them to believe us and try us that they will be very happy with Oak Street and stay as long-term patients. And so, I think, there’s really two ways in that framework that we can really benefit from the relationship with the AARP.
Way number one is it allows us to get in front of more people and it will be another channel to meet people. We can invite AARP members into open houses and health education events and some of the things we do. And again, we find a very large sense of people we need and certainly a large sense of people that come to visit a center, end up becoming patients. So, I think that’s kind of piece one as a way to meet more people and get more engaged.
And then number two, I think, is a way to engender more trust early on. I think one of the challenges we have is rising above kind of the noise in healthcare were everyone’s saying the same thing and people are used to things that are going to be true being that way.
And so a situation where we can leverage the fact that’s the most trusted brand, and then they have selected us as their sole primary care part nationally. I think that’s a great way to kind of overcome the fear of the unknown for people.
And again, if people try us, they are really going to be satisfied. So that’s really -- so a huge opportunity is -- this kind of hard to quantify exactly at this time, but again, we remain optimistic over the coming years is going to be a nice driver of our growth.
Got it. Thanks guys.
Our next question comes from the line of Brian Tanquilut from Jefferies. You are line is open. Sorry, Brian Tanquilut from Jefferies. You are line is still open. Our next question comes from the line of Sarah James from Barclays. You are line is open.
Thank you. I wanted to go back to the comment on new member economics, the expectation that it’s not going to look like 2019. Is that primarily because of COVID or are there other thing that mix going on there and when would you expect that to get to 2019 levels?
Thanks, Sarah. It’s Tim. I’d say for -- COVID has been the primary driver and that is impacting -- it’s impacting the dynamic through a few different angles. The first is just patients accessing the health care system in a way that’s consistent with how they did in 2019 and prior.
It’s hard to predict when the world will look more normal, particularly when we have got new variants every three months to four months creating different levels of responses across the country, right? If we think about, generally speaking, to Northern geographies, they have reacted more strongly towards COVID versus our Southern geographies.
So, it’s a challenge to put a specific time as to when the world might look more normal from a health care utilization perspective. But that would be the biggest driver of that and a combination of just lower COVID costs in the system more generally.
But it’s a combination both revenue and med costs, and unfortunately, it’s almost again to predicting when COVID will be less of it a driver in the market than it is today. And I think that’s or look more endemic all of the flu, and I think that’s just hard to predict at this point.
Got it. And then on DC you commented that structurally, it’s got a higher medical cost ratio. But are you still thinking that as an EBITDA margin profile similar to your other business or how should we think about the profit contribution?
Yes. So, the MLR or the medical loss ratio is higher, but the revenue is higher. Therefore, the net PMPM dollars to us from many of those patients is fairly comparable to our average MA patients and that has remained unchanged.
Our next question comes from the line of Andrew Mok from UBS. You are line is open.
Hi. Good morning. Given the increases in input costs even outside of labor, can you help us understand how the startup cost of a new clinic today compares to 18 months ago? Is that $5 million of cash investment over a two-year period still a good number to anchor to or are you starting to see that number drift upwards? Thanks.
Yeah. I don’t -- apologize if we misspoke. I don’t think we mentioned our input costs being higher. I think we are seeing similar cost structures to what we saw, have seen in the past, whether that be labor or other inputs to our model.
So I don’t anticipate or see any changes to kind of -- from what we shared at the Investor Day, what we shared previously to kind of the cost to start up with center and kind of the return profile of those centers.
Got it. So, you are not seeing any inflation on either construction costs or raw materials on the de novo side?
No. Not [Technical Difficulty]
Okay. That’s helpful. And then independent of clinic opening, is there a natural component to elevated SG&A in Q4 related to the Medicare open enrollment period that we should consider?
No. There’s nothing specific related to AEP that would create higher levels of G&A. G&A seasonality, as it exists, is more tied to the pace of investments that we are making in the business and our center growth, and there’s nothing really, there aren’t really onetime costs related to G&A.
I would say from sales and marketing perspective, we would expect heavier investment in Q4 just to support that time of year when there’s a lot of seniors focused on their healthcare for the following year and correspondingly, lower investment in sales and marketing in Q1, generally speaking. But from a G&A perspective, nothing that AEP is going to drive.
Got it. Okay. Thank you. Thanks for the color.
Our last question comes from the line of David Larsen from BTIG. You are line is open.
Hi. Can you talk a little bit about the capitated revenue per at-risk patient, like the dollars you are bringing in from the MA plans, how do you expect that to trend over 2022? It looks like it was up around 6% year-over-year this quarter? And then related to that, how do you expect the patient contribution margin to trend over the course of 2022? It looks like it was down over 600 basis points year-over-year, but up sequentially? Thanks a lot.
Yeah. David, it’s Tim. So, from a revenue PMPM perspective, I would say, your question, I believe, was how is that going to trend over 2022 or over the longer term? I am sorry, just to clarify.
Well, since you brought it up over the course of 2022 and then the MA rate increases for 2023 look very healthy up anywhere from 4% to 8% or more. Any thoughts there would be helpful as well. Thanks.
Sure. So for 2022, I’d say, I’d expect last year, we had the benefit from Q1 to Q2 of direct contracting entering the mix. So, that was a little bit anomalous in 2021. But I think, generally speaking, you can look at our historical financials and I wouldn’t expect anything tremendously different from an intra-year seasonality on revenue PMPM perspective, the one caveat being that to the extent that we have faster new patients that will tend to lower that rate, because new patients are going to come in at a lower revenue level.
Over the longer term, it’s hard to know exactly how those rate increases -- what those rate increases from the government to the plans, the benchmark increases will be and it’s also hard to know how those rate increases will work themselves into the MA plan bids and then ultimately flow down to Oak Street.
So, I think, it’s difficult, you can look at kind of where we are at year-over-year and make some suppositions. I’d say, over the course of time, I wouldn’t expect for MA rates to increase 6% annually into perpetuity, of course.
From a patient contribution perspective over the course of the year, generally speaking, Q1 is always going to be the most profitable quarter from a -- on a margin perspective in Q4 the least and back to this dynamic on new patients.
In Q1, the average patient tenure is the highest, because we have most -- more of our patients were in patients in 2020, in the prior year than will be the case at the end of the year, right? Over the course of the year, we will have attrition of patients, much of that attrition will be for patients who have joined us in the prior year and those patients, again, are more profitable.
So you are placing more profitable tenured patients with less profitable newer patients and you are also growing the business, of course. So the combination -- the effects of that new patient growth are going to blend down that patient contribution over the year, and then you would expect the step-up from Q4 to Q1, as you mentioned.
Okay. Very helpful. Thanks a lot, Tim.
There are no further questions at this time. Now I will turn the call back over to the presenters.
That is all. Thank you. Apologies everyone for the technology difficulties and happy to follow-up if there are additional questions. So thank you very much for your time this morning.
This concludes today’s conference call. Thank you everyone for participating. You may now disconnect.