agilon health - Q1 2023
May 9, 2023
Transcript
Operator (participant)
Thank you all for joining. I'd like to welcome you all to agilon health first Quarter 2023 Earnings Conference Call. My name is Brika, and I will be Operator for today's call. At this time, all participants are in a listen-only mode, and after the speaker's remarks, you will have an opportunity to ask a question. To do so, please press Star, then 1 on your telephone keypad. If you change your mind, please press Star, then 2. For Operator assistance at any point, it's the Star 0 key. Thank you. I would now like to turn the call over to Matthew Gillmor, Vice President of Investor Relations. Matthew, you may begin.
Matthew Gillmor (VP of Investor Relations)
Thank you, operator. Good afternoon, welcome to the call. With me is our CEO, Steve Sell, and our CFO, Tim Bensley. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results.
A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K file with the SEC. You'll note from the press release that we've changed the presentation for certain non-GAAP financial measures. Before Steve's remarks, Tim will review these changes. With that, let me turn the call over to Tim.
Tim Bensley (CFO)
Thanks, Matt. Before we give our prepared remarks, I want to review the revised presentation for Adjusted EBITDA and Gross Profit. As you know, we've always been committed to transparency and provide a lot of details on our performance. We recently made the determination that we should include geography entry costs within Adjusted EBITDA to conform to the SEC's recent guidance on non-GAAP financial measures. We will continue to provide transparency around these investments on a go-forward basis. For clarity, we want to define Gross Profit and Adjusted EBITDA before we begin the call. We've replaced Network Contribution with GAAP Gross Profit. Gross Profit is total revenues, less medical services expense, and other medical expenses, which include a portion of geography entry costs. Adjusted EBITDA now includes total geography entry costs, which was $12 million in the quarter.
This includes the portion of geography entry costs within our other medical expenses and geography entry costs within our G&A expenses. With that, I'll turn the call over to Steve.
Steve Sell (CEO)
Thanks, Tim. Good evening, and thank you for joining us. We've had a very successful start to the year, and we are making rapid progress against our vision to transform healthcare in 100+ communities by empowering primary care doctors. We are hosting today's call from the Twin Cities in Minnesota, where we recently launched our partnership with two leading physician groups, Entira Family Clinics and Richfield Medical Group. Entira and Richfield are highly respected with a deep history and connectivity across the region. Through our partnership, we have introduced a new model for senior care in Minnesota with a multi-payer, full-risk platform. We see significant opportunities for growth in the Twin Cities as physicians have a strong history of participating in early value-based care models. Primary care is largely fragmented outside of several large health systems.
Our partnership with Entira and Richfield is serving as a catalyst for other physicians to make a similar choice and move to full risk for their senior patients. As discussed at our Investor Day, once the infrastructure for full risk is established in a community, other doctors can easily join our network and access a new and sustainable model for primary care. The associated long-term growth opportunity or end market TAM in the 14 states and 32 communities we serve is now 10.5 million seniors and 33,000 primary care doctors. We are excited for more of these doctors and their senior patients to join our platform in the Twin Cities and throughout the entire agilon network. To our performance in the first quarter. Our overall momentum remains strong entering 2023.
During the quarter, our MA membership grew 61% to 402,000 members. Revenues grew 74% to $1.14 billion. This was above our guidance ranges and supported by faster stand-up of new primary care doctors and pull-through of members in new markets. Our ability to pull through more members in 2023 supports our long-term earnings power as we improve the quality and efficiency of care for those senior patients over time. At the same time, our profitability continues to inflect higher, with first quarter Medical Margin up 88% to $162 million and Adjusted EBITDA more than tripling to $24 million. Our growth in Medical Margin and Adjusted EBITDA was especially impressive given a modest net headwind from prior year claims and revenue.
Even with our stronger membership growth, our Medical Margin increased 17% on a per member per month basis to $135 and by 110 basis points to 14.3% of revenues. This was primarily supported by strong performance in our maturing partner markets. Our ability to expand margins while driving higher membership growth remains very distinctive, reflecting the power of our partnership model, platform, and scale. With our strong start to the year, we are maintaining the full year Adjusted EBITDA outlook we provided in March. Under the revised presentation that Tim outlined at the top of the call, our Adjusted EBITDA outlook ranges from a loss of $3 million to a gain of $25 million, which includes $78 million-$65 million of geography entry costs.
Our guidance also reflects faster pull-through of members in our new markets and increasing confidence in the contribution from REACH based on higher than initially projected outperformance against national cost benchmarks. We are also encouraged with the progress we are seeing with enrollment in our clinical programs targeted at the most complex and high-cost patients. These programs, such as renal and palliative care, leverage our deep alignment with primary care doctors while driving continuous improvement to patient experience, quality, and costs. I'm especially proud of our performance given the magnitude of the growth we are driving across different partners, markets, and payers. During the first quarter, we added 130,000+ new Medicare Advantage lives, eight new markets, four new states, and nine additional payers.
With this growth, we are now operating close to 100 distinct full risk contracts with nearly 30 payer partners, including national and regional plans. You consider that most of our payer partners have never done full risk, our ability to be first in a market and build the infrastructure for risk-based care that all physicians can access is a significant competitive advantage and requires the management of complex data flows such as member and financial data reconciliations. Increasingly, agilon health is differentiated in our ability to move new markets to risk and successfully work with a broad diversity of payers. Before updating you on our future growth opportunities, I wanted to say a few words on our revised non-GAAP measures. The most important change is we are now including geography entry costs within our Adjusted EBITDA calculation.
I want to stress that our revised presentation does not impact how we think about our business, our cash flow, or returns on capital. Ultimately, our goal is to get members on the platform, improve access, quality, and efficiency of care delivery, and develop medical margins over the long term. Geography entry costs are investments we make to set up our partnership, establish processes that enable primary care doctors to be successful in value-based care, especially around patient access and quality, and expand overall primary care capacity. Because we partner with existing physician organizations, the efficiency and returns we generate on our geography entry costs are very compelling. As we have discussed with you in the past, member acquisition costs have consistently remained in a range of $400-$600 per member.
They generate an LTV to CAC of greater than 10 to 1, and these costs only grow on an absolute basis as the number of new members increases. For an update on our 2024 partners and some early observations for 2025. As we shared with you in March, we expect 2024 will be another record year of growth. We are currently implementing over 100,000 Medicare Advantage lives across 6 new partner groups, which include primary care only groups, multi-specialty scaled networks, and health systems. Our implementation work is progressing well, supported by our recently completed acquisition of mphrX and our established infrastructure in existing states and markets. Our early engagement with payers has been encouraging.
We are optimistic that the combination of new and existing partner growth could pull through greater than 145,000 total new MA members for 2024, which would be similar to our experience of increasing expectations for final expected membership for 2023. Our business development team is now shifting their focus to 2025. While it's very early, we are seeing significant opportunities across diverse partner types and geographies, including new markets and large physician organizations in existing markets. Similar to last year, we are encouraged with the quality of the dialogue this early in the cycle, which should translate into longer implementation periods. In fact, we expect to begin implementing several new partners for the class of 2025 during the second half of the year.
As I've said in the past, the inflection in demand among physician groups for a sustainable primary care model reflects both structural factors from all payers pushing for value and the level of success that our partner groups are seeing on the platform. I wanted to close by offering a few comments on the 2024 rate notice and recent policy developments. We are encouraged and supportive of the risk adjustment model changes included in the 2024 rate notice, including the three-year phase-in. We believe the phased approach will limit industry disruption, especially for health plans and at-risk provider organizations that serve high-risk populations. Operationally, we are already implementing the necessary changes for the 2024 notice. As I mentioned on the last call, we believe the rate notice is very manageable for agilon.
This reflects our combined power and nimbleness from centralized operations paired with local teams tightly integrated with primary care doctors, as well as our focus on historically unmanaged fee-for-service markets that serve the entire Medicare Advantage population and yield relatively lower risk adjustment levels. In addition, the distinctive levers in our business provide the ability to manage through disruption. Levers such as getting more members on the platform early, delivering a more effective and longer implementation for new partners, and accelerating quality and medical cost performance in mature markets. The three-year phase-in of the risk model change removes uncertainty and reinforces our confidence in our ability to continue to inflect adjusted EBITDA in 2024 and beyond. From a macro perspective, the rate notice, along with the RADV final rule, reinforces the central role of primary care doctors in our healthcare system, which is very positive for agilon and our partners.
With these changes, health plans will need even closer alignment with PCPs to drive better cost and quality outcomes and support competitive benefits. Doctors will need infrastructure, resources, and technology to succeed in value-based care and meet the demands from all payers, including CMS. agilon's partnership and platform is the solution for existing doctors to move into full risk, and the success of our growing network continues to demonstrate the critical role we and our partners are playing in transforming the overall healthcare system. With that, let me turn things over to Tim.
Tim Bensley (CFO)
Thanks, Steve. Good evening, everyone. I'll review highlights from our financial statements to provide some additional details on our guidance for 2023. Starting with our membership for the first quarter. Total members live on the agilon platform increased to 491,000, including both Medicare Advantage members and ACO REACH beneficiaries. Our consolidated Medicare Advantage membership increased 61% to 402,000. This was above our guidance range of 385,000-390,000, driven by retro membership from 4Q and the faster pull-through of members in new markets, including better-than-expected payer contracting and attribution. Revenues increased 74% on a year-over-year basis to $1.14 billion during the first quarter, which was also above our guidance range of $1.07 billion-$1.09 billion.
Revenue growth was primarily driven by membership gains in new and existing geographies. On a per member per month basis or PMPM, revenue increased 8% during the first quarter. This was primarily driven by benchmark updates and membership mix, including higher benchmarks in several new markets. Medical Margin increased 88% year-over-year to $162 million during the first quarter. Medical Margin increased as both a percentage of revenue and on a PMPM basis, even while accounting for the dilution of our membership growth. Membership margin was 14.3% of revenue during the first quarter, compared to 13.2% last year, and Medical Margin PMPM increased 17% to $135, compared to $116 last year.
Medical Margin benefited from the maturation of older markets and member cohorts, which continue to offset dilution from our year one members. Medical Margins for our year two plus partners, which excludes the dilution from year one markets, increased 72% during the first quarter on a dollar basis, and by 47% on a PMPM basis. As we've discussed with you in the past, Medical Margin growth in our year two plus partners drives the majority of our Adjusted EBITDA gains. Our Medical Margins for the quarter included a net headwind of $12 million from prior year revenue and claims. This was primarily a function of true-ups with health plans, including new contracts, which include both prior year claims and revenues, a number of smaller, older, high-cost claims, and some retro members, which also include both prior year claims and revenue.
Gross Profit, which is replacing Network Contribution, increased 82% to $77 million during the first quarter and includes $2 million in geography entry costs. The year-over-year increase in Gross Profit reflects our strong Medical Margin, as well as the relative contribution of Medical Margin across geographies. Platform support costs, which include market and enterprise-level G&A, increased 41% to $48 million. Growth in our platform support cost continues to run well below our revenue growth and highlights the light overhead structure of our partnership model. As a percentage of revenue, platform support costs declined to 4.2% during the first quarter, compared to 5.2% last year. Adjusted EBITDA was $24 million in the quarter, which is a threefold increase from $8 million last year.
Adjusted EBITDA now includes geography entry cost, which was $12 million in the first quarter of 2023, and $4 million in the first quarter of 2022. The increase to Adjusted EBITDA reflects the gains in Medical Margin and Gross Profit, along with leverage against platform support costs. Adjusted EBITDA contribution from Direct Contracting was $3 million in the first quarter, similar to last year. Turning to our balance sheet and cash flow. As of March 31st, we have over $800 million of cash and marketable securities. Cash flow from operations was negative $61 million for the quarter, which was in line with our expectations. In February, we completed the previously announced acquisition of mphrX, a leading provider of value-based care technology and interoperability solutions, for a cash consideration of $44 million.
agilon remains well capitalized, and given our efficient partnership model, we do not anticipate needing any external capital to drive our future growth. Turning now to our financial guidance for the second quarter and full year 2023. For the second quarter, we expect ending membership live on the agilon platform will grow to a range of 488,000-495,000, including
5% growth in MA membership to 403,000-405,000, and ACO REACH membership of 85,000-90,000. We expect revenue in a range of $1.105 billion-$1.115 billion, or 66% growth at the midpoint. We expect medical margin in the range of $138 million-$148 million, representing 74% growth, and Adjusted EBITDA of $2 million-$10 million compared to -$3 million in the prior year. Our Adjusted EBITDA outlook for the second quarter now includes $19 million-$16 million in geography entry costs.
For the full year of 2023, we expect total membership live on the agilon platform will grow to 490,000-500,000 members. This includes higher MA membership outlook of 405,000-410,000, representing growth of approximately 51% at the midpoint, and ACO REACH membership unchanged at 85,000-90,000 members. Revenue growth is now expected to increase 63% at the midpoint to a range of $4.41 billion-$4.44 billion. We anticipate Medical Margin in a range of $535 million-$560 million and Adjusted EBITDA in a range of -$3 million to +$25 million. Our Adjusted EBITDA outlook for the full year 2023 now includes $78 million-$65 million in geography entry costs.
Our Adjusted EBITDA outlook includes $5 million-$10 million in contribution from REACH, but we now have increased confidence in the higher end of that range. We're now ready to take your questions. Operator?
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, please press star then one on your telephone keypad. If you change your mind at any time, please press star two. Please note that we ask you to limit yourself to one question, and then we ask that you please get back in the queue for a follow-up. We have the first question from Lisa Gill of J.P. Morgan.
Lisa Gill (Managing Director)
Thanks very much. Good afternoon, and congratulations on a great quarter. Steve, I want to go back to the comments that you made about the 2024 class. You know, there's just so many things that are changing right now, and I understand what you're saying around the risk model changes and your ability to absorb that. We also have changes coming for many of the plans when it comes to stars. We do have rates that are not as robust as they've been in the last few years. I'm just curious about the conversations that you're having with the physician group.
One, is that helping to maybe accelerate some things as we think about, you're now talking about this 2025 class already here, and we're only in the first quarter or second quarter here of 2023? Just curious around when those conversations that you're having? Two, is there any more detail that you can give us, you know, to really give us the comfort, going into 2024 when we think about margins and the potential impact of all these changes?
Steve Sell (CEO)
Sure. Thanks, Lisa. Great question. I think for the class of 2024, and even as I shared with the class of 2025, we're very encouraged by the conversations. I think never has the case been stronger for physician groups to make the move to value, and that's really a macro thing. Structurally, more payers are pushing for value. In the constrained world, you talked about the benefits of better quality, the benefits of better experience, the way Medicare pays for that, all rewards a total care tight relationship between the primary care doctor and their patients. I think that is really at the heart. The second thing I would say is the fee-for-service challenges just become that much more dramatic.
Rising labor costs for doctors, compressed primary care rates with the Medicare fee schedule, all of that makes the status quo that much more difficult. The combination of those structural factors are really pushing these groups forward. The payer conversations are extremely constructive. Payers are looking for us to go to new markets, bring on new members. The pull-through that Tim talked about is accelerating. We continue to bring on new members faster, and early growth is really impactful. That will benefit us in 2024 to your forward question. I think the maturation in our mature partner markets, coupled with a rate notice that, as I said, is really very manageable, and we're implementing that right now, and that's going very well.
I think that all leads to a very strong picture for us, not just in 2023, but in 2024 and beyond. We are becoming the partner of choice for physicians, and we're moving more and more markets to value for the first time.
Lisa Gill (Managing Director)
Thank you.
Operator (participant)
We now have George Hill of Deutsche Bank.
George Hill (Managing Director and Senior Research Analyst)
Yeah. Good morning, guys. I appreciate you taking the question. Steve, kind of a popular topic that we're hearing a lot about these days is the changes in insulin drug pricing. You would think insulin could be a meaningful cost contributor in a diabetic population as it relates to Medicare Advantage. I guess my question was just really is, are the changes in insulin prices big enough to be needle movers as you guys think about medical costs and kind of the cost that your provider partners face?
Steve Sell (CEO)
Yeah. No, thanks, George. I really appreciate it. I mean, diabetics represent you know, 25%-30% of the senior population, as we shared with you at our Investor Day, we do an exceptionally good job of managing that diabetic population, and controlling blood glucose levels, and showing improvements in cost and keeping people out of the hospital at a magnitude of 2x-3x better than the overall Medicare Advantage population. Insulin is a component of that. I don't think that the changes that are contemplated would be a massive game changer for us. Each year, there are things that move up and down, and we believe we'd be able to manage that within the context of our overall outlook.
Operator (participant)
Thank you.
Matthew Gillmor (VP of Investor Relations)
Thanks, George. Rika, why don't we move to the next question, please?
Operator (participant)
We now have Ryan Daniels of William Blair.
Ryan Daniels (Group Head of Healthcare Technology and Services)
Guys, I'll echo the congrats on the strong start to the year. My question relates to the acceleration you saw in same-store growth in Q1 being up 14%, up from Q4, despite what appears to be kind of slower overall MA growth. Is there any nuances there to explain it? You talked about bringing on members more quickly, but I assume you've also got novel payer partners, some providers joining, maybe some share gains. What explains the relative strength versus the market, which is an even bigger delta than what we've seen in the past? Thanks.
Steve Sell (CEO)
Yeah. Thanks, Ryan. I mean, we typically outperform above the market growth rate. We shoot for 1.5x to up to 2x that. Same geography growth has continued to be a really strong area for us. I think if you would ask what's really different on that is that our doctors continue to win in a really meaningful way, and other doctors are wanting to join us in bringing new patients with them. We also have got tighter pull-through with our health plans, as Tim kind of dimensioned, which is really resulting in a faster acceleration of that same geography growth. Tim, would you add other?
Tim Bensley (CFO)
Yeah. Just a couple other things, George. One is, we did mention in our comments that we had a little bit of retro membership coming through from last year, so that's gonna help our Q1, and that's gonna look like better same geography growth as well. Then the second thing is, if you remember back to last year, we did have a chunk of retro membership that came in in Q2, so that actually depressed our Q1 same geography overlap a little bit, and we had a very, very strong Q2. We still think for the full year this year, our overall same geography growth is gonna be around that double-digit range, just to kind of refer back to the guidance that we provided at Investor Day.
George Hill (Managing Director and Senior Research Analyst)
Thanks, Ryan.
Operator (participant)
We now have Justin Lake of Wolfe Research.
Justin Lake (Managing Director and Senior Research Analyst)
Thanks. First wanted to say, appreciate the increased transparency on the new market cost. I think it's really helpful. Just talking a lot of questions around cost trends. Maybe you can talk to us about the first quarter and how it shaped up. First, you know, what drove the PYD? How did you see trend in the quarter? What off-- I mean, there's a fair amount of PYD. What went well in the quarter to offset it and still allow you to kinda get the numbers? Thanks.
Steve Sell (CEO)
Yeah. Thanks, Justin. I, you know, I'll start with what I said in my prepared remarks. I mean, the Q1 performance was really strong. Membership growth, revenue growth, membership up 61%. We were able to drive that inflection in Medical Margin of 110 basis points year over year, even inclusive of that higher growth. It's a net $12 million of prior period development, both from a revenue and a cost perspective, and Tim can kind of dimension that for you. I think, you know, part of it, Justin, is really a function of the true ups that we've got. You know, I called out we're up to almost 100 risk contracts with payers. Last year, it was at 60 across 20 different organizations. Many of those organizations were doing it for the first time.
There's a lot of data flowing back and forth, and we need to have credible information to the point at which we can book revenue and cost. That was a big part of the period. The utilization was very much in line with what we would expect. I think, you know, the power of our clinical programs that I talked about, the power of the primary care physician touch points were really strong in the quarter. We enrolled thousands of seniors within those complex medical programs I talked about, things like palliative care and renal care. They had an impact in the quarter, Justin, but the impact is gonna be far greater on a forward basis. Those were the things that I would dimension. Tim?
Tim Bensley (CFO)
Yeah. The only other thing, Steve Sell, that I would say just first before I jump into is, I mean, I'm sorry. Justin Lake, thanks for the comment on the transparency on the geo interest. I would say I think we've been very transparent, you know, all along in what those costs are. Yeah, we're gonna continue now to report it under this new presentation, thanks for that comment. The only other thing I would add to what Steve Sell said around drivers in the first quarter is, we also did have obviously incremental membership that helped, you know, drive some incremental Medical Margin that helped the quarter as well, both retro and just overall higher membership than we had expected. As Steve Sell said, you know, we've got a very complex model.
We are bringing a lot of new payers and a lot of new markets to risk for the first time, that's gonna result over time as having some true-ups. You know, as we move along, we, of course, have, you know, really are committed to trying to have the most accurate accruals for revenue and cost that we can. We want those true-ups to be obviously in a manageable level. I think for the first quarter, a $12 million net number between revenue was actually quite manageable for us. I mean, when you look at the factors that drive it, they are the factors that kind of come out of that complexity.
You know, just some true-ups around both revenue and claims across a number of payers, you know, as we got more data after we'd already reported the fourth quarter. You know, we had a couple of old, you know, very high-cost claims that were, you know, kind of spread out through the year that we got visibility to after we closed Q4. Then, you know, we also talked about we had some retro members that came in, and those members come with, of course, both, as I mentioned in my prepared comments, both revenue and claims as well. There's gonna be those kinds of true-ups. Again, you know, we wanna try to keep that, you know, as accurate as possible and obviously within a manageable range, which I think it was for the first quarter.
Matthew Gillmor (VP of Investor Relations)
Thanks a lot, Justin. Rika, why don't we move to the next one?
Operator (participant)
We now have Stephen Baxter of Wells Fargo Securities.
Carol Wong (Senior Associate)
Hi, this is Carol on for Steve. We've seen the 10-Q in your payer disclosure that it looks like a lot of your growth this year is coming outside of your top two payers, despite both of these plans putting up membership that's probably above industry as a whole. Can you maybe talk a little bit more about what trend you're seeing across the payers and whether these top players could be looking into steer or members towards internal primary care assets? Any color there would be helpful. Thank you.
Steve Sell (CEO)
Thanks for the question. I think the payer dynamic is increasingly favorable for us. We consider our payer partners to be great partners. As I said, we added nine payers this year. We continue to expand the number of payers that we're working with. I think it reflects the fact that more payers want to be in value in a much larger way. It also reflects that we're going to new markets that have been 100% fee-for-service, and we're moving the market and these payers into that. We'll continue to diversify. We'll continue to add new payers as we expand to new markets. Our large national payers continue to be very strong partners, and we work with them very closely through quarterly joint operating committees.
We are collaborating very closely on next year as they work through benefit designs and what they want to do around that. Also just the clinical programs and the quality performance that I talked about is very advantageous to them. I think all of that leads to a very constructive environment for payers and one that we think is just strengthening.
Tim Bensley (CFO)
Yeah. I think the only thing I would add is when you're referring to the numbers in the Q, when you see the shift in mix amongst payers, especially in two of our biggest markets that we just went live with, we have pretty good regional payer representation in those markets. You're gonna naturally see a shift in that direction when we add large markets like Maine and United Physicians in the Detroit area that have a very large representation of regional payers. 'Cause to Steve's point, when we go into a market, we're essentially contracting, you know, across all payers in the market.
I think that shift to markets that have very big regional presence, regional payer presence is what's driving some of that mix shift that you're seeing in the Q reporting.
Matthew Gillmor (VP of Investor Relations)
Thanks for the question. Why don't we move to the next one, please?
Operator (participant)
We now have Jailendra Singh from Truist.
Jailendra Singh (Managing Director)
Yeah. Hi. Thanks. Thanks for taking my question. This is Jailendra Singh from Truist. I want to better understand your 2023 Medical Margin outlook. I know it's unchanged. It seems some moving parts there. Now it has PYD from Q1. Looks like utilization is probably trending maybe favorably expectation. Maybe talk about some puts and takes, which are now in the guidance, given that you're coming in at the revenue membership higher than what you previously thought. Just flush some color there in the guidance therefore.
Steve Sell (CEO)
Sure. I'll start, Tim, and then you can fill in. I mean, I think it starts, Jailendra Singh, with our Q1 performance was really strong, and you've got that inflection in medical margin and Adjusted EBITDA even with the PYD. I think that the run rate out of the first quarter is extremely strong. I think if you look at sort of the rest of year and reaffirming that guide, it would have us within that 80 to 150 basis point improvement. We just had a run rate that was north of 200 in the first quarter at X that PMPM. We're able to digest sort of additional members coming on, which are gonna be at a, obviously, a lower medical margin.
The maturation of our year two markets was strong in Q1, and that continues within the balance of the year, and then just the power from our clinical programs. Tim, what else would you add?
Tim Bensley (CFO)
Yeah. I think to nail that, Steve, I think those are all the primary components driving it. I think that, you know, pointing out that, you know, coming off of a strong Q1 and absorbing that $12 million of partner development and then looking going forward, I think that range of, you know, that Steve was quoting of, say, you know, 80 or 90 to 150 basis points improvement is kind of right on the trend that we showed in the first quarter.
Matthew Gillmor (VP of Investor Relations)
Thanks, Jailendra. Operator, why don't we move to the next question, please?
Operator (participant)
We now have Adam Ron of Bank of America.
Adam Ron (VP of Equity Research)
Hey guys, thanks for the question. If I could go back to the 2024 rate model revision, maybe from a different angle. On the, you know, Q1 earnings call from Humana, they were kinda touching on it, and they were saying that they think it would be a net headwind even of, you know, when contemplating benefit changes, and they would look for, you know, mitigants over time. It sounds like you're saying it's gonna be a little bit more manageable than how they're painting it. You did touch on, you know, geographic differences. You know, they're more exposed to Florida, where, you know, value-based care is more penetrated and risk scores are higher. On the other hand, being a new market, you would probably be more of an outlier as a, you know, new entrant.
That would make it harder to overcome benefit changes. Just wondering how you would frame, you know, your characterization versus maybe Humana and what differences you see between the two organizations. Thanks.
Steve Sell (CEO)
Yeah. Thanks, Adam. I really appreciate the question. I mean, I think I'd start with the headline of there are real differences between our partnership model and payers. It is a very different model. I think that the risk adjustment changes really have emphasized the importance of the primary care physician-patient relationship, and that's our bread and butter. What do we focus on? We focus on increasing touch points, identifying the most complex patients, getting them enrolled in the clinical programs, and that's what we saw within the quarter and what gives us sort of confidence, not just in 2023, but in 2024. I think, as I said, we're encouraged by the risk model changes and the phase-in. We've started implementing them and continue to see it as very manageable.
I think it's a function of that patient-physician relationship and the proximity there, but also what you said, which is we are in markets that are 100% fee-for-service and lower overall. I think the last thing I would say is the levers in our business, and this is a big difference versus a payer, is the value of really getting members on the platform earlier in a long-term subscription model, the ability to have these longer implementation periods, so our year one members are gonna start in a higher place. The ability to show this maturation, which we saw again, Q1 to Q1 in mature markets, that just continues as you move going forward. All of that is leading to our ability to say it's very manageable.
Operator (participant)
We now have Sean Dodge with RBC Capital Markets.
Sean Dodge (Equity Research Analyst and Managing Director)
Yep. Thanks. Yeah, good afternoon. Maybe just going back to medical margins again. You've historically talked about year one being in the $30-$60 PMPM range. When we look at the class of 2024, is there anything different about its composition, the geographies, you know, the fact that you all have a little bit longer lead time on implementations than you've had in the past? You know, I guess the capabilities from the mphrX acquisition that would cause year one medical margins for 2024 to be a bit different than they've been in the past? Or, you know, I guess directionally where I'm heading is, could they be higher than that or at least toward the higher end of that range?
Steve Sell (CEO)
Yeah. Yeah, Sean, I think you answered the question very well. I think all three of those things. You know, one thing that can impact it just as a starting point is what sort of the level of sophistication of the partners that we're starting with, I think we have a pretty high level there going into the class of 2024. You know, that gets us a little bit of a starting point. The second thing is, you know, as we have talked about and you pointed out, we definitely have a longer implementation cycle for these members coming on board, and that's gonna help us as well.
Now with the acquisition and the implementation of mphrX, we really are prioritizing that against, you know, getting up to speed faster with data that'll help us also move that forward and will allow us to impact, you know, both the revenue side as well as, you know, getting markets up and started on some of our clinical programs earlier than they would otherwise. I think all three of those are contributors. Because of that, you know, we did say, you know, we're normally in that $30-$60 range. The class of 2023 looks like it's, you know, dead center in that range, more or less.
We do think that the class of 2024, and, you know, as we talked about on our Investor Day, is gonna be, you know, at or above the high end of that range.
Matthew Gillmor (VP of Investor Relations)
Sean, there's one more thing I'd love Steve to hit on this, would just be when you're adding groups where you have existing infrastructure, there is a little bit of a different dynamic, so Steve, if you could.
Steve Sell (CEO)
Yeah. The class of 2024, Sean, is really the first class in which you start to see really scaled new partners across multiple markets coming on in existing geographies in which we've got a team, we've got existing payer contracts, we've got existing clinical programs, and they are able to take advantage of all of that as they go through their implementation, which can be longer, as Tim said, for this class of 2024. You put that as an added sort of modifier on top of it, and it leads you to the really strong potential year 1 performance.
Matthew Gillmor (VP of Investor Relations)
Sean, thanks for the question. Rika, why don't we move to the next one, please?
Operator (participant)
We now have Whit Mayo of SVB Securities.
Whit Mayo (Managing Director and Senior Research Analyst)
Hey, thanks. Tim, sorry, I'm just a little confused on the reserve development. The net $12 million, that's net of the retro payment, and the 10-Q has the $28 million reserve development.
Tim Bensley (CFO)
Yeah.
Whit Mayo (Managing Director and Senior Research Analyst)
I'm just trying to make sure I get these numbers right. Sorry.
Tim Bensley (CFO)
Yeah. Yeah. If you break down into components, then, you know, we wanna make sure that, you know, for all the reasons that we talked about, and we do have some of these variations that are gonna happen versus our original estimates, you know, after we've already reported and that's just gonna be driven by all the factors that we talked about. That can happen on both the revenue and the claims side. Of course, in the 10-Q, in that section, we do have to report out what the claims development was, which was a little over $28 million. We have about $16 million of revenue prior period that goes against that, of positive prior periods.
When you net those two, it's about $12 million impact to the PNL in Q1 from all in prior periods.
Whit Mayo (Managing Director and Senior Research Analyst)
Okay. No, sorry. That's helpful. Just looking at, you know, your plan partners, are you seeing any, you know, changes with the payers to speed up the attribution process? I'm just wondering if there's anything that you're seeing that's enhancing your visibility on that process going forward?
Steve Sell (CEO)
With our longer-term partners, absolutely, Whit. We are working particularly with some of the larger nationals, accelerating or shortening the period to get a member attributed and getting them into a total care relationship is a goal of both of our agilon health and the payer. That is definitely true. We added 9 payers this year, the vast majority of which had never done risk before, and they don't even have an attribution process. We start from zero, and we kinda work through. That's part of what we're doing, is we're moving these markets to risk for the first time. It's just not the groups and the patients, it's also the health plans.
We've got sort of folks across the spectrum in terms of where they're at on this process, but we continually work to improve across all of those payers.
Matthew Gillmor (VP of Investor Relations)
All right, Whit. Thanks very much. Operator, why don't we move to the next one?
Operator (participant)
We now have Jamie Perse with Goldman Sachs.
Jamie Perse (Stock Analyst)
Hey, good afternoon, guys. Just a longer-term question. You guys just gave guidance for 2026 Adjusted EBITDA of over $600 million. I'm wondering if you can help us bridge that given the new presentation structure and any longer term considerations for geography entry costs as we start to kinda tease those pieces apart a little bit more. Thanks.
Steve Sell (CEO)
Sure. Jamie, you know, just to kinda reiterate, the geography entry costs, they've been there all along. They're part of our business. They're really important for getting these physicians and partners into value for the first time and allows us to get patients in and start at a really good standing point. This is really just a reporting change, so we're just moving the, no pun intended, the geography of these costs to within our financial statements, so they're part of the Adjusted EBITDA calculation. They're super predictable, and so it should be relatively easy to do the math. It's in that range of $400-$600 per patient that will be added for the coming year. They only grow in absolute dollars when that membership grows. The return on them continues to be extremely strong.
The LTV to CAC is greater than 10 to one. Our commitment is to continue to dimension this for you so that we've given you guidance for next quarter, we've given you guidance for the full year, and we'll continue to do that on a go-forward basis. Then, Tim.
Tim Bensley (CFO)
Yeah. No, Steve, I think that's right. If you try to dimension it specifically, you know, we just said that we're gonna do about $65 million-$78 million of geography entry costs this year, and that's gonna support about 145,000 member growth that we've guided to for 2024 cause the cost, obviously, the investment in growth kind of is supporting that membership the year before they go live or the year before we can get them attributed or go live. If you look forward into kind of the 2024-2026 period, we said we'd, you know, continue to add about 150,000 members a year to get to 2026.
That would say that, you know, if you use that same range of $400-$600, it's gonna be, you know, geography entry costs will be in the same dollar range. Obviously, it'll be a much smaller percentage of our overall, you know, EBITDA. EBITDA is, you know, is growing to a larger number out at that point. To Steve's point, one of the reasons why EBITDA is growing to a larger number is because we're making these investments in growth each year. Yeah, the return on investment in these are phenomenal. I mean, Steve quoted the, you know, the Lifetime Value to Customer Acquisition Cost ratio. I mean, another way to look at it is we're typically paying those costs back in, you know, certainly less than two years, usually closer to an average of about one year.
You know, we'll continue to make those investments. You know, I think to Steve's point, if you look at the membership that we said we're gonna grow and use that, you know, $400-$600 per member range, that's gonna be about right.
Matthew Gillmor (VP of Investor Relations)
Thanks a lot, Jamie. Operator, why don't we move to the next question, please?
Operator (participant)
We now have Gary Taylor of Cowen.
Gary Taylor (Managing Director and Equity Research)
Hey, good afternoon. I just wanna, I think this is pretty clear, but I just wanna, I guess, reiterate it. If we look at the net development of $12 million and $35 million of EBITDA under old presentation, really from your view, this was a $47 million EBITDA quarter versus your guide of $32 million-$37 million. That's how you're looking at this on a net basis, right?
Steve Sell (CEO)
No, Gary, the $12 million of net development is, would be Medical Margin, not EBITDA. Were you saying just add... You wouldn't add that to our EBITDA? Is that what you're asking?
Gary Taylor (Managing Director and Equity Research)
Yeah.
Steve Sell (CEO)
Yeah.
Gary Taylor (Managing Director and Equity Research)
Under your old report.
Steve Sell (CEO)
The net development will hit. Under the old report, yes, on the old reporting, or under either reporting...
Gary Taylor (Managing Director and Equity Research)
Yeah
Steve Sell (CEO)
... the $12 million of net under any reporting, because we haven't changed medical margin definition, the $12 million would be, would have been incremental to medical margin had we not had that prior period development. Typically, about half of that incremental medical margin dollars flows through to EBITDA. You know, it'd be about half that number. Does that make sense?
Operator (participant)
We know.
Gary Taylor (Managing Director and Equity Research)
Yeah. just a
Matthew Gillmor (VP of Investor Relations)
Thank you, Gary.
Gary Taylor (Managing Director and Equity Research)
Uh, just-
Matthew Gillmor (VP of Investor Relations)
Gary, why don't you go ahead, just 'cause I know it was a numbers question, so go for it.
Gary Taylor (Managing Director and Equity Research)
All right, sir.
Matthew Gillmor (VP of Investor Relations)
We'll move on.
Gary Taylor (Managing Director and Equity Research)
For those of us that are trying to follow and make sense of the claims payable and the receivables, I mean, both of those approximately doubled sequentially versus, like, 65% revenue growth sequentially. I think that's just a function of new markets, new contracts, new payers, nothing's actually gonna settle out until the year progresses. Is that the right way to think about both those balance sheet numbers clean up?
Steve Sell (CEO)
Yeah.
Gary Taylor (Managing Director and Equity Research)
Yep.
Steve Sell (CEO)
It is, Gary. That's right. You're always gonna see a sequential increase for our DCP, for instance, between Q4 and Q1, driven by exactly the phenomena that you're talking about. As we move through this year and we get more and more visibility to pay claims with our new payer partners in our new markets, by the time we get to Q4, you'll see that, you know, that number moderate back down again as it has in the previous couple of years.
Gary Taylor (Managing Director and Equity Research)
Yeah, thank you.
Matthew Gillmor (VP of Investor Relations)
All right, Gary. Thanks very much. Rika, why don't we move to our next question, please?
Operator (participant)
Our next question comes from David Larsen from BTIG.
David Larsen (Managing Director)
Hi. I think you announced five new 2024 partnership wins, which seems like a lot to me. I'm assuming you're on track for 670,000 lives for fiscal 2024. How far along are you in that life sort of count add guide with these 5 wins that you've announced? Are you, like, halfway there, or? Thanks.
Steve Sell (CEO)
We have announced five of six new partners, David, for the class of 2024. What we said in our remarks is that we are at 145,000, but just like with 23 member growth, there is the potential for that number to go higher through a variety of factors. We're already onto the class of 2025. What I also said in my prepared remarks is that we will begin implementing two partners for the class of 2025 in the second half of this year. You continue to see this faster sales cycle. You continue to see longer implementation periods. While there's opportunity in 24 member growth, we're onto 25 in terms of new partners and the work that we're doing there.
Matthew Gillmor (VP of Investor Relations)
David, I would just add that the sixth one will be announced.
David Larsen (Managing Director)
Yeah
Matthew Gillmor (VP of Investor Relations)
when we're ready to announce, and we're just thoughtful about the timing around that. Rika, why don't we move to our next question, please?
Operator (participant)
We now have Brian Tanquilut of Jefferies.
Brian Tanquilut (Senior Equity Analyst)
Hey, good afternoon, guys. Just a quick question. As I think about your comment about 2025 development, and that's a focus area now, and how 2024 is really your, you know, bunch of scaled ones, how are those conversations changing in terms of, like, trying to pitch potential new partners? You know, in terms of, like, market competition for deals, it seems like there's more money chasing, or more money or more practices looking to shift to value-based. Just curious what the competitive market looks like. Thanks.
Steve Sell (CEO)
Yeah. I think the power of our network is really sort of helping us within these conversations. When you think about the fact, Ryan, that we've got 30+ markets with leading groups, we're approaching 1.5% of the primary care doctors in the country are on our platform, and they're bringing their senior patients with them. We've got national scale, like things in the clinical programs that I talked about. The track record of the success that our partners are having, in addition to the push for more value from payers that I talked about, it's accelerating. I mean, the sales cycle is shortening. We are already talking to two partners about implementing them, starting in the back half of this year.
As I said in my remarks, we're really extremely encouraged. The breadth of the types of partners that we're serving, we're now working with virtually every type of physician organization in the country. Any group that wants to talk to us that is thinking about making the move to value, not only can we say, "Here's our overall track record, but here's a group that looks like you, thinks like you, and here has been their experience." That's the best track record that you can have in groups that are thinking about making those types of decisions.
Brian Tanquilut (Senior Equity Analyst)
Brian, thanks very much.
Operator (participant)
Thank you. We have no further questions in the queue, so I'd like to hand it back to Steve Sell for any final remarks.
Steve Sell (CEO)
All right. Thank you, operator. In closing, I'd just like to say we've had a really strong start to the year, and we're making great progress against our vision. I do wanna thank our physician partners for the trust they've placed in agilon. I wanna thank my colleagues here at agilon for their hard work and dedication in supporting senior patients and physician partners. We're excited about where we're going. We look forward to updating you on our progress in future calls, I hope everyone has a great evening. Thank you.
Operator (participant)
Thank you all for joining. I can confirm that does conclude today's call. Please have a lovely rest of your day, and you may now disconnect your lines.