Q4 2023 NeueHealth Inc Earnings Call

Participants

Emily Lombardi

Mike Mikan; Vice Chairman, CEO & President; NeueHealth, Inc.

Jay Matushak; CFO; NeueHealth, Inc.

Tomas Orozco; EVP; NeueHealth, Inc.

Joshua Raskin; Analyst; Nephron Research LLC

Presentation

Operator

Good morning. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the leaf health Q4 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by one on your telephone keypad.
If you change your mind, please press star followed by two.
I'll now turn the call over to our host, Emily Liu, somebody.
You may now begin your conference

Emily Lombardi

Good morning, and welcome to NeueHealth Fourth Quarter 2023 earnings conference call. As a reminder, this call is being recorded. Leading the call today are new hubs, President and CEO, Mike McKenna and CFO, Jay Medusa.
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, our present expectations. A description of some of the risks and uncertainties can be found in the reports that we file 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 measurements for reconciliation of the non-GAAP to GAAP measures as available in the Company's fourth quarter press release available on the company's Investor Relations page at investors dot new hall.com. Information presented on this call is contained in the earnings release we issued this morning. In our Form eight K dated March 2024 and in the related presentation, each of which may be accessed from the Investor Relations page of the company's website.
With that I will now turn the conference over to new health, Chief Executive Officer, Mike Nefkens.

Mike Mikan

Good morning, everyone, and thank you for joining NeueHealthHealth's Fourth Quarter 2023 earnings call. As previously announced in January, Bright Health group adopted new health as our corporate branding to reflect our ongoing focus on a core and successful part of our company. Our care delivery and provider enablement business. Today, we are pleased to announce strong fourth quarter and full year results in 2023 for Nu laying a solid foundation for continued success in 2024. We believe new health is a business with much greater predictability and significantly less volatility as we expect to achieve adjusted EBITDA profitability in both our new care and new solutions segment and at the enterprise level in 2024.
Before we get into more detail on our 2023 financial performance, I would like to recognize the significant milestones we reached as a company to start the year on January first, 2024, we closed the sale of our California Medicare Advantage business, which consisted of brand-new day and central health plan to Molina concurrent with the close of the sale, we also announced that we made the final repayment on our amended credit facility with JPMorgan. This eliminated the company's secured debt. This was a significant step as it allows us to further focus on where we have proven to have the greatest impact through our value-driven care delivery and provider enablement business although our business has evolved over the last few years, our core beliefs have not changed since our founding. We have been committed to uniquely aligning the interests of payers, providers and consumers to deliver a better healthier experience for all the health care industry continues to evolve and shift towards value-based care. We believe our differentiated care model and ability to serve all populations in performance-based arrangements puts us in a strong position to capture this growing opportunity in 2024 and beyond.
On the call today, I'll start with a discussion of our two go-forward business segments, new CARE and new solutions and talk about why we are confident in the future of our differentiated value-driven care model. Then I'll turn it over to Jay to provide additional details on our financial performance. Our new care segment is focused on delivering value-driven consumer-centric care through our own clinics and partnerships with affiliated providers. Our model is unique and we believe that when we tightly aligned the interests of stakeholders clinically financially and through data and technology, we can drive differentiated value and deliver a truly personalized care experience. That's tailored to meet the needs of each consumer. New Care's positive momentum continued in the fourth quarter, leading to strong full year results. Nuclear segment adjusted EBITDA was $42.9 million for 2023.
Excluding the impact of the goodwill impairment we discussed in the third quarter, NeueCare delivered operating income of $32 million for the full year and realized $169.7 million of gross profit for the full year in 2024, we expect to continue to drive growth in our new care settings, strengthening relationships with our existing payer partners, engaging in new payer partnerships and continuing to attract and retain consumers through our value-driven model, we see our ability to effectively manage a diverse population mix, agnostic of product category as a key differentiator that will fuel future growth. In 2024, we expect to serve between 330,000 and ,345,000 value-based consumers through our owned and affiliated clinics, an increase of approximately 17% over 2023.
Turning now to our new solutions segment. This is our provider enablement business focused on partnering with independent providers and medical groups to enable them to succeed in performance-based arrangements. New solutions also supports our new care business with care management referral management and other population health tools and capabilities. This business reflects our core and overarching focus on aligning interests to maximize value for all and represents a significant growth opportunity as more providers look to enter risk-bearing arrays. We believe new solutions provides a strong platform for our company to continue to grow and enter new provider partnerships and manage a diverse population base. Specifically, we see growth opportunities to serve additional Medicaid consumers in partnership with federally qualified health centers and other provider groups. In our ACO reach business, we encountered some headwinds that impacted our results in 2023, including Babylon bankruptcy filing and the impact of CMS adjustments to financial benchmarks, notably the coding intensity factor, which Jay will discuss more in a moment. Excluding these factors, our reach ACOs delivered strong performance in line with our expectations for 2024. We reevaluated the participating providers in our ACOs and did not renew the contracts of certain underperforming groups. We also added new strategic provider partners more closely aligned with our goal. As a result, we expect overall margins to improve with greater insight into the returning population of Medicare beneficiaries, we are managing and a more optimal partner. We are seeing strong growth opportunities on the provider enablement side of new solutions. During the fourth quarter, we secured new partnerships with provider groups increasing the lives we are serving to over 106,000. This growth is significant and shows the value providers see in our partnership and deep experience in managing diverse populations in performance-based arrangements. We see our provider enablement and ACO reach businesses as complementary with each driving future growth opportunities for the other.
I'll now hand it over to Jay to provide additional details on our fourth quarter and full year performance and our 2024 outlook.

Jay Matushak

Thank you, Mike, and good morning, everyone. I'll start with a discussion of our fourth quarter performance and full year results for our consolidated new health business as well as each of our new care new solutions segments.
Now I'll provide an update on the wind down of our ACA insurance business and go over our balance sheet.
Finally, I'll provide an overview of our 2024 outlook. Before I begin, I would like to note that I will be focusing on the 2023 financial results of our continuing new health business and each of our new care and new solutions segments GAAP financials are included in our press release and 10-K that will be filed in the coming months. And Canadian results include our discontinued operations, new health consolidated revenue for the fourth quarter was $292.9 million. Full year consolidated revenue was $1.2 billion, representing 55% growth year over year on a comparable basis.
Fourth quarter gross margin was $28 million in land, $164.2 million for the full year new wells. Adjusted EBITDA loss for the fourth quarter was $10.4 million and full-year adjusted EBITDA loss was $8.5 million when excluding the impact of nonrecurring bad debt write-off in our new care segment as well as the impacts of the CMS benchmark adjustments in our ACO reach business. New health adjusted EBITDA was approximately breakeven for the full year. In 2023, we grew the number of consumers we serve across our new care and new solutions segments considerably to 461,000, which represents growth of 294% over the prior year. Excluding the consumer serve in partnership with the former Bright Health Care commercial segment.
And the nuclear segment revenue was $71.3 million in the fourth quarter and $267.2 million for the full year in line with expectations and resulting from increased attributed members to our clinics. We continue to be prudent and level of risk we are taking in our contracts. We recognize that there is opportunity for greater revenue and margin expansion as we look to take on greater risk sharing and participate in more fully capitated models in the future.
Operating costs were favorable for the full year with medical costs moderately higher. Fourth quarter operating income was $3.7 million with full-year operating income of $32 million, excluding the goodwill impairment recognized in third quarter.
Additionally, new care segment adjusted EBITDA was positive $42.9 million for the full year through our clinics in 2023. We serve consumers across the ACA marketplace, Medicare and Medicaid, totaling approximately 293,000 value-based consumers. In 2024, we expect our new care segment to continue to drive growth and deliver differentiated value to providers, payers and consumers. This year, we will continue to focus on enhancing our value-driven consumer-centric care model, build upon long-standing relationships with existing payer partners, prioritize engagement and growth with new payers.
Turning now to our new solutions segment. In 2023, performance in new solutions was largely driven by our ACO reach business. We are now entering our 3rd year participating in ACO reach and continuing to see strong alignment between the goals of the program and our commitment to aligning interest to make highly high quality health care or accessible and affordable. The ratio reached a contract with CMS to assume the full performance risk of the Medicare fee for service beneficiaries aligned with our provider partners and contract separately with provider partners to share in the performance risk of their aligned beneficiaries has grown significantly over the years. We participated in the program 2023, we partnered with 11 provider groups in over 3,000 affiliated providers. We serve 62,000 Medicare beneficiaries across the country. New solutions revenue was $220.9 million in the fourth quarter and $899.4 million for the full year. In line with expectations. Operating costs were in line with expectations with medical costs higher for the full year.
The new solutions segment operating loss was $14.6 million for the fourth quarter with operating loss of $42.5 million for the full year.
As we mentioned in our Q3 earnings call, our new solutions results have been significantly impacted by our relationship with Avolon Medical Group with an ACO reach due to Babylon bankruptcy. We established a reserve against a receivable in the third quarter, creating a bad debt charge of $22.4 million for the quarter. We also retain full responsibility for the deficit of their attributed members for the balance of 2023. This negatively impacted gross margin by $14 million in 2023. In addition to Babylon our ACO risk performance was also negatively impacted by CMS benchmark revenue adjustments, most notably the coding intensity factor New Solutions adjusted EBITDA for the full year was a loss of $6 million, which excludes the bad debt expense and the additional Babylon deficit. And these are onetime items that don't reflect the ongoing expectations for the business.
Aside from battle on our reach. Acos performed well and continued to be a source of stable top line growth when excluding the Babylon impact, our new solutions segment revenue for the full year was $591.7 million, which represents a 49% increase over 2022. And full year operating loss was $6 million, excluding Babylon in 2023 we served over 42,000 Medicare beneficiaries, 50% growth over 2022, not including Babylon in 2024. We have diligently vetted providers. We will partner with as part of the ACO REACH program. Based on historical performance relative to regional benchmarks.
With a carefully selected group of high-performing providers, we believe we are well positioned to drive strong performance in ACO reach in 2024. For this year, we expect to serve 45,000 Medicare beneficiaries slightly above 2023 when excluding Babylon and expect revenue of between $690 million – $700 million
for the full year. As Mike mentioned, in addition to ACO reach, our new solutions segment offers enablement services to both our own clinics and independent providers and medical groups. We are starting 2024 with new provider partnerships in this part of our business, serving over 100,000 consumers with their enablement business as a strong platform to expand our relationships with provider groups and leverage our expertise in managing all populations and performance-based arrangements.
Turning to the ACA insurance business, wind-down continued to make significant progress in the wind-down in the fourth quarter. As of today, we believe we are more than 99% complete on medical claims BA-CA insurance business at the end of the fourth quarter, our ACE insurance business had approximately $150 million in excess cash surplus after reserving for expected medical costs and other anticipated wind down expenses not including risk adjustment obligations due under our prepayment agreements with CMS. Additionally, subject to adjustments in the conditions in a sale agreement, we expect to receive an additional $110 million from escrow.
We intend to use these funds if and when received to offset liabilities in our discontinued ACA insurance business, such as the obligations on the CMS repayment agreements which come due on or before March 14th, 2025. Overall, we believe the remaining liability related to this business, it's substantially less and more certain heading into 2024 Now looking at our balance sheet.
As of December 31st, 2023, we had $411 million in total cash and investments, including amounts in our regulated entities our nonregulated cash and short-term investments were $94 million as of the end of Q4. As Mike mentioned earlier, we need to file repayment on our amended credit facility at the beginning of 2024, which eliminated our secured debt start off the year. We are a significantly stronger capital position and we believe we are well positioned for the future in 2024, we expect consolidated revenue of approximately $1 billion. Specifically, we expect between $310 million – $320 million from our new care segment and between$690 million – $700 million
from our new solutions segment. We expect enterprise adjusted EBITDA to be between $15 million and $25 million dollars in 2024, we expect to sell between 475,000 to 500,000 consumers across both our new care and new solutions segments, serving between 330, 000-345,000 value-based consumers in our clinics and between 145,000 to 155,000 consumers in new solutions, including approximately 45,000 through ACO reach. Finally, we expect our adjusted operating cost ratio to be between 15% and 16%.
As I mentioned earlier, it is important to note that there is substantial opportunity for revenue growth as we look to take on greater levels of risk-sharing in our contracts, considering the total number of lives we serve in 2023, our total revenue opportunity is over $2.5 billion in future, we will look for opportunities to take on greater risk sharing as appropriate in 2024. We believe a few key factors will drive improved profitability. First, growth in consumer served specifically through our clinics as well as through the enablement side of our new solutions segment. Our differentiated value-driven model has proven to deliver strong consumer satisfaction scores, and we expect to continue to attract and retain consumers in our clinics and through provider partnerships.
Second, we expect to continue to build on long-standing relationships with our payer partners while also prioritizing growth with new payers as we continue to demonstrate differentiated performance in managing populations across the ACA marketplace, Medicare and Medicaid.
Third, we expect to drive improved performance in ACO reach by optimizing our partner portfolio and leveraging our past experience in the program to effectively manage the Medicare population. And finally, we are continuing to take steps to reduce operating expenses and rightsize our business for long-term sustainable growth. We are confident in our go-forward business and the value we will drive for stakeholders across the health care ecosystem. I'll now turn it back over to Mike for some closing remarks.

Mike Mikan

Thank you, Jake. This is an exciting time for our company as we focus on our care delivery and provider enablement business, where we have proven to drive the greatest value for payers, providers and consumers. Both our value driven consumer-centric care model is unique and in combination with our ability to align the interests of key stakeholders clinically financially and through data and technology, we believe we can transform health care and create a better experience for all as the industry continues to shift towards value-based care. We are well positioned to take the lead and we see significant future growth opportunities in both our new care and new solutions segment.
I would like to thank the entire new health team for their continued hard work and dedication over the past year. I have great confidence in our people and the differentiated value-driven care model. We have built. Thank you for joining the call and for your interest in new health. We'll now take the first question.

Question and Answer Session

Operator

(Operator Instructions)
Joshua Raskin from Nephron Research. Your line is now open. Please go ahead.

Joshua Raskin

Hi, thanks. Good morning. I wanted to start, I guess just a balance sheet question. So first is, could you just confirm what the total actual proceeds from Molina were in early January? And then how much is pending in escrow and and what are the variables that that escrow depends on?
Yes. So the proceeds the proceeds received from the Molina transaction in January were $390 million.
What was the second question, Josh, how much is pending in escrow and what are the what's the timing and what are the milestones for that to come in? Is that just the claims and adjustments them.

Mike Mikan

It's $110 million of that wealth is tied to CMS pending approval of the consolidation of Brand New Day and central health plan side, each contract or if we achieve a three star in the Part DBMD. business. So either way, either of those being achieved would be the return of the $100 million the other $10 million is related indemnity, and we expect that the $100 million to come in later this year, probably Q4 of '24 and $10 million related to other indemnity items likely in early '25 some time.

Joshua Raskin

Okay, got it. So you had $87 million at the end of the year. You got the$390 million you paid off of the $390 million, you paid off the $304 million and then you've got another $110 million coming in. So I guess the last piece of the puzzle is what cash flow from operations. If you're going to do $20 million of EBITDA, what does that translate into cash flow from ops this year was about half.

Mike Mikan

So our free cash flow positive. But the way the way I kind of not the capital position, Josh, is we've got, as Jay mentioned, we've got about $90 million at the end of the year of nonregulated cash. So we after you buy netted out from the gross proceeds and netted out the payments to the bank repayment transaction costs, we put $30-plus million on the balance sheet.
So we started the year with about $120 million of nonregulated cash.
As Jay mentioned, we've got about $150 million of cash and surplus, but we expect to get back from entities that were in the surplus position. And then we've got the $110 million that we expect assuming CMS approves the consolidation from the Molina transaction. And so those are kind of the cash and capital that we are relying on today. And then offsetting that is the CMS. repayment agreement, which is $290 million, which we'll be accruing interest depending on when we pay it down based on the surplus return, which we're working on right now that that's the obligation that remains out there.
So we're at a meaningfully stronger cash capital position today.
And you know, I feel good about the future.

Joshua Raskin

Yes, that's what I was getting at $380 million of total cash $290 million of total CMS repayment and free cash flow, let's call it $10 million. That's kind of the math of that was government. So that's super helpful. And then I guess just more importantly, can you talk about ACO region sort of, you know, the reevaluation of partners and sort of what gives you comfort that the existing partners are strong partners and that these are going to be positive income generators in 2024?

Mike Mikan

Yes, I'll start. And maybe I'll ask Thomas Roscoe who's our Executive Vice President and runs our day-to-day operations to maybe add in if he has something to add.
But we've taken a detailed look at all of our provider partners and let's start with a core set of our provider partners, our own private owned and employed providers within our organization, and they perform very well. So we feel very confident that within our organization and our provider base that we've got strong performance that understand how to manage population risk, use our tools and provider enablement capabilities.
And so we've got a strong foundation of those. Obviously, in 22 and 23, we have partnerships with and the likes of Babylon, which unfortunately while we weren't taking significant downside risk as a contractual matter unfortunately for me with them going bankrupt, we it came back to us in terms of their losses. And so that was a big impact.
We don't have anywhere near that level of concentration.
That was a big part of our ACO book of business. We're not we will no longer take any that type of concentration risk going forward.
So as we look to the future. We look to providers, as Jay said, where we could see historical performance strong against the benchmarks. And I don't know, Thomas, I don't have anything to add to that?
Yes.

Tomas Orozco

Thanks, Mike. And Josh, a great question. And I think you know, Mike's point is the right one in terms of how we selected our partners going into 2020 for their performance in 2023, which was favorable on new partners that we've added. I think we feel great in terms of network composition, but I think the piece that I'd highlight is how we're deploying our capabilities in supporting these providers and their performance on the ACO REACH program. I think this being our 3rd year, you know, just how we're coordinating those capabilities. How we're partnering with the providers just gives us and a tremendous amount of confidence in terms of our performance and thus being able to support their underlying performance so I think the 3rd year model's evolved network composition far more favorable and just the connectivity between us and our affiliate partners and how we're deploying key capabilities, i.e., care management current chronic care management, patient engagement capabilities, I think is going to make all the difference.

Mike Mikan

And Josh, I would just add that, you know, one last, Jeff, just one more add on to that.
And just to be clear, while we believe in the ACO REACH program, we really view it as very much aligned with our provider enablement business.
We're partnering with providers who are moving to managed care population risk, taking downside risk.
And so it very much aligns with our business.
And so we're excited about the long-term prospects, but the critical element is to make sure you're partnering with providers who are committed to managing population risk.
And so that's something that we've been very focused on.
We're not focused on growth just for growth. We're focused on growth where we know we can not only provide high-quality care but provided underpin a profitable basis.

Joshua Raskin

Yes, that makes sense. And if I could just sneak in one more just on the exchanges on the individual exchanges. I'm curious about utilization trends into the fourth quarter and whether you saw any increases in utilization towards the end of the year, if you're seeing anything in January or February and the runout of claims that would suggest, you know, there's been some pickup in utilization.

Mike Mikan

No, we really haven't just in all that we are seeing stable trends, and we haven't seen anything weighing on the Medicare business.
It's been noted that we've saw some elevated trends, especially with elective procedures and outpatient care in the later part of the year, but that's stuff that we've seen typically in the fourth quarter.
So we don't have any noteworthy utilization changes in the fourth quarter and the ACX and the exchanges.

Joshua Raskin

Perfect. Thanks again.

Operator

(Operator Instructions)
We have no further questions at this time. I'll now hand the call back over to Mike.
Mike for any closing remarks.

Mike Mikan

Great. Thanks for your interest in new health, and we look forward to updating you again shortly.
Thanks.

Operator

You may now disconnect your line.