Privia Health Group - Q4 2022

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Privia Health Q4 2022 Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone, and then hear an automated message advising your hand is raised. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I'd now like to hand the call back over to our speaker today, Robert Borchert, SVP of Investor and Corporate Communications.

Robert Borchert (SVP of Investor and Corporate Communications)

Thank you, Gerald, and good morning, everyone. Joining me today are Shawn Morris, our Chief Executive Officer, Parth Mehrotra, President and Chief Operating Officer, and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed from the investor relations section of priviahealth.com. Today's press release highlighting our financial and operating performance and the slide presentation accompanying our formal remarks are posted on the investor relations section of priviahealth.com. Following our prepared comments, we will open the line for questions. Given the number of analysts in the queue, we ask you please limit yourself to one question only and return to the queue if you have a follow-up so we can get to as many questions as possible.

The financial results reported today and in the press release are preliminary and are not final until our Form 10-K for the year ended December 31st, 2022 is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of February 28th, 2023. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. These statements should be considered in conjunction with the cautionary statements in today's press release and the risk factors described in our company's most recent SEC filings.

Finally, we may refer to certain non-GAAP financial measures on the call and reconciliations of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now I'll turn the call over to Shawn.

Shawn Morris (CEO)

Thank you, Robert, and good morning, everyone. Privia Health delivered a tremendous year of financial and operating performance in 2022. We continue to extend our geographic reach, positively impact care delivery and partnership with more than 3,600 providers in Privia Medical Group and an additional 1,400 providers in Privia Care Partners. This market momentum and highly aligned partnership model continues to be driven by growth on multiple fronts, supporting our high level of confidence in our business outlook for 2023. We expect to continue to increase our number of provider partners, expand attributed lives and at-risk value-based arrangements, and grow our presence in the new markets we've recently entered. This morning, I'll review a number of key business highlights.

David will discuss our recent financial performance and our 23 guidance outlook. Parth will offer a market and operational update before we take your questions. Throughout 2022, Privia Health executed and delivered at a very high level with full year financial performance at or above the high end of our updated guidance provided in November. Practice collections increased more than 49% year-over-year to reach $2.42 billion. Adjusted EBITDA was up more than 47% to a record $61 million. Our consistent performance was driven by a healthy balance of same-store growth, new provider additions in existing markets, and strength in ambulatory and value-based utilization across all of our existing practice locations. We've entered a number of new states in the last few months.

North Carolina and Ohio offer abundant opportunities to attract new providers to our medical group platform. More recently, we've entered Connecticut and Delaware with our Privia Care Partners strategy, offering community physicians an opportunity to join Privia and leverage our platform solutions and population health expertise while caring for patients across all reimbursement models. Our entry into these four states validates our growth algorithm, significantly expanding our addressable market and organic growth opportunity, and are significant steps toward our long-term goal to build one of the largest care delivery networks in the nation. We continue to see very strong sales pipeline of potential new providers across our existing markets and are maintaining a healthy business development pipeline as we look to continue to enter new states over the next few years.

We now have more than 100 value-based care arrangements with payers in commercial, Medicare Advantage, and Medicaid plans, and we continue to see very strong performance across the board. A year ago, we initially moved 23,000 Medicare beneficiaries into our first capitated agreements. Beginning January 1st, 2023, we now have over 40,000 capitated lives, an increase of more than 38% from the year-end 2022. Overall, we now have approximately 1.1 million attributed lives covered by our value-based care arrangements from upside only to significant downside risk. This aligns perfectly with our long-term strategy to thoughtfully move providers and their patients to value-based arrangements when we are confident we can be more successful doing so.

Our business momentum and high forward visibility is driving our 2023 financial guidance, with practice collections expected to reach $2.7 billion or higher. We will continue to invest significantly across our enterprise to support our long-term growth and market expansion goals and still expect strong Adjusted EBITDA growth and free cash flow conversion. I'll ask David to review our recent financial results and 2023 outlook.

David Mountcastle (CFO)

Thank you, Shawn. Privia Health operating model continues to scale, and we again deliver strong performance in the fourth quarter of 2022.

Our implemented provider count of 3,606 was up 8.7% year-over-year. We updated our definition of implemented providers to exclude any temporary locum tenens providers. This growth in implemented providers, combined with our capitated agreements and solid ambulatory utilization trends, led to practice collections increasing 23.7% from Q4 a year ago to reach $634.8 million. The operating leverage in our model is clearly apparent as our top line and care margin growth translated into significant EBITDA growth, with Adjusted EBITDA up 89.5% over Q4 last year to $14.3 million. For full year 2022, practice collections increased 49.1% over 2021 to more than $2.4 billion.

Care margin was up 28.2%. Adjusted EBITDA grew 47.1% to reach $60.9 million for the year. We added a sources of revenue schedule in our press release this quarter so you can see the breakdown of the value-based care and fee-for-service GAAP revenue. Total value-based care comprised 28.5% of total GAAP revenue in 2022, compared to 12.4% in the previous year. As a reminder, our GAAP revenue significantly understates total medical costs under management across our value-based care arrangements, including in the Medicare Shared Savings Program. We also included a provider liability disclosure that captures the medical costs related to our at-risk capitated contracts. This shows that we booked a care margin of $264,000 from our capitated agreements in 2022.

While we are still in the early stages of these capitation arrangements, we are focused on improving patient outcomes, lowering costs, and improving profitability for Privia and our provider partners. Our balance sheet and capital position continue to be very strong with $348 million of cash and no debt. Free cash flow for 2022 was $47.1 million. Adjusting for $8 million of one-time cash costs, including employer taxes on pre-IPO equity options exercised by our employees, as well as legal, severance, and other non-recurring expenses, the conversion from EBITDA to free cash flow was approximately 91%. Our strong 2022 performance and business momentum has positioned us well heading into this year. Using the midpoint of our 2023 guidance, implemented providers are expected to increase about 14% year-over-year to reach 4,100 by year-end.

Attributed lives are up 28% from 2022 to 1.1 million. We expect practice collections to grow 14.5% to more than $2.7 billion and Adjusted EBITDA to increase 18.3%, both at the midpoint of our guidance. We remain confident in achieving our long-term targets of 20% practice collections growth and 30% adjusted EBITDA growth per year on average. As we've moved into 2023, we have entered four new states, launched three new ACOs, and added 11,000 capitated lives. We plan to continue to invest across our business enterprise in clinical, operational performance, sales, leadership, and technology infrastructure to support our significant expansion. Since new market entry and expansion costs are an ongoing and regular part of our long-term growth strategy, we do not add these expenses back to get to Adjusted EBITDA.

Our 2023 Adjusted EBITDA guidance absorbs approximately $8 million-$10 million in investments. We expect our new markets to scale significantly in the coming years as we grow our provider base and attributed lives in these new states. With our capital-efficient partnership model, we expect 80%-90% of our adjusted EBITDA to convert to free cash flow. Parth will provide an update on our market growth, value-based care footprint, and geographic expansion.

Parth Mehrotra (President and COO)

Thanks, David. Privia Health has performed extremely well over the past four years. We have gained momentum since our IPO and continue to execute on multiple fronts to extend our market reach, drive future growth, and positively impact care delivery. We have exceeded our long-term growth target since 2020, averaging annual practice collections growth of about 29% and Adjusted EBITDA growth of close to 35% over these four years. To reiterate, we continue to believe we can grow practice collections 20% and Adjusted EBITDA 30% a year on average with our proven long-term growth and profitability algorithm. Our performance has clearly demonstrated our execution capabilities and success in transitioning to at-risk contracts over time as we generate increased profitability under those arrangements. We expect EBITDA and free cash flow growth each year while investing in our operating infrastructure to support our growth and expansion.

We continue to be very encouraged by Privia's business momentum across both existing and potential new geographies. Our national footprint now includes more than 3,600 implemented providers in our medical groups, caring for over four million patients in 950 locations across 12 states and the District of Columbia. Our scale, geographic density, and partnerships across more than 50 specialty types enable us to offer our providers, payers, and patients a broad ambulatory care delivery network that can improve patient outcomes and reduce costs. Privia Care Partner providers are not included in our implemented provider count. The patient lives associated with Privia Care Partners are included in our 1.1 million total value-based attributed lives. We believe there is a significant opportunity for us to move these Privia Care Partner providers to our full services platform over time.

While our entry in each state may look unique, given our partnership model, our strategy is simple, consistent, and replicable across all states. We enter new geographies and set up four primary elements. First, a single tax ID entity that facilitates payer negotiations and clinical alignment while maintaining a provider's legacy ownership structure. Second, an accountable care organization for risk-bearing value-based contracts. Third, our tech and services platform offers providers a breadth of cloud-based applications and expertise to help reduce administrative burden, increase efficiency, and lower medical costs. Last, but most important, our close alignment with physicians is critical in successfully managing patient panels across the risk spectrum. We create a physician-led governance structure in our medical groups for data and analytics reviews, as well as peer-to-peer sharing of clinical and operational best practices.

Privia's operating model offers a unique ability to partner with and organize providers of all types, whether it's community physicians, health systems, clinically integrated networks, Independent Physician Associations, or other facility-based providers across all specialties. Our flexible model enables us to offer solutions for all providers, no matter where they are in the transition to value-based care. We drive performance improvement through same-store volume and practice growth, add on valuable ancillary services over time, and move to value-based care arrangements when we are confident we can be more successful doing so. Privia's very thoughtful move to risk and value-based arrangements is a key differentiator. We believe our doctors get better results than their peers due to our physician-led governance, extensive clinical performance and actuarial expertise, and clear incentives that keep us highly aligned. We take a balanced approach across a diverse set of commercial, Medicare, and Medicaid contracts.

Our success over the last eight years is key to our collaboration with our provider and payer partners. In 2021 performance year alone, we generated savings of over $100 million in the Medicare Shared Savings Program. Privia's value-based care platform continues to be one of the broadest, most balanced, and diversified in the industry. We now cover an estimated 1.1 million attributed lives across more than 100 at-risk payer contracts in commercial and government programs. This includes our newest ACOs in Connecticut and Delaware. Today, we take upside and downside risk on more than 70% of our attributed lives across the Medicare Shared Savings or similar programs. We now have more than 40,000 Medicare Advantage lives, or approximately 35% of our total MA lives in capitated arrangements with significant downside risk.

We believe there is a significant embedded opportunity for us to move a number of the remaining lives into upside and downside risk arrangements and realize the earnings power associated with lowering of medical costs on those lives. We also continue to take significant steps towards building a national network of primary and specialty care providers. Following our partnership with Novant Health in North Carolina and OhioHealth, we announced an agreement in January with Beebe Healthcare, a community health system in Delaware, to launch an accountable care organization where we are participating in the MSSP enhanced track with more than 12,000 patient lives. Two weeks ago, we announced our partnership with Community Medical Group to launch an ACO with the largest clinically integrated network in Connecticut, comprising more than 1,100 multi-specialty providers.

Privia Health is the majority owner of the ACO, and we contract with commercial and Medicare payers covering approximately 180,000 patient lives attributed to value-based arrangements, including 29,000 Medicare beneficiaries. Today, we have approximately 1,440 providers in our Privia Care Partners model, with about 220,000 attributed lives in various value-based care programs. Privia Care Partners provides us an opportunity to increase the pipeline of community physicians to implement and leverage Privia's full technology and services platform in the future. In summary, we remain focused on growing and expanding our business for many years to come as we build our national footprint. We wanted to leave you with this photo of a bus ad running in our North Carolina market in partnership with Novant. Doctors have a fundamental choice of where they practice.

Privia offers a unique alternative for community physicians across all specialties, entire patient panels, and all reimbursement models. An alternative where doctors can remain in their legacy ownership structure, remain autonomous if they choose to, and yet be part of a bigger organization. An option that we believe was not truly available in the past. With that, operator, we're now ready for the first question.

Operator (participant)

Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by while we compile our Q&A roster. One moment, please. Our first question comes from Brian Tanquilut from Jefferies. Your line is now open.

Taji Phillips (Equity Research Associate covering Healthcare Services)

Hi. Good morning. You have Taji on for Brian. Clearly we've seen you be very aggressive in pursuing partnerships with health systems and physician practices in the back half of 2022 and into 2023. Can you maybe discuss expectations for 2023? Is the focus here integration, or are you optimistic about the potential pipeline for additional partnerships?

Parth Mehrotra (President and COO)

Thanks for the question. Our pipeline continues to remain pretty robust for new markets. We are focused both on expanding the footprint in existing geographies where there's a pretty inherent large stamp with the opening up of the new states and even the states we are operating in today. We continue to pursue entering into new states. I mean, we're in 12 states, we have 38 to go, so we're pretty much full steam ahead. It's both strategies.

Operator (participant)

Thank you. Our next question... One moment, please. Our next question comes from David Larsen of BTIG. Your line is now open.

David Larsen (Managing Director and Senior Equity Research Analyst covering Healthcare and Health‑technology Companies)

Hi. Congratulations on the very good quarter and the good guidance. Can you talk a bit about the impact of the RADV program and the advanced rate notice? I'm getting some feedback, sorry about that. Does that drive incremental demand for Privia? What are your thoughts there, please? Thank you.

Shawn Morris (CEO)

Hey, Dave, it's Shawn. As you can imagine, we take a very thoughtful and disciplined approach, as, you know, as you'd expect us to. We hold ourselves to very high standards along with our providers when it comes to risk adjustment or any other type of quality or compliance program. You know, it's we don't believe RADV is gonna have a material impact to us. But, you know, just kind of with the way we've run the program in the past, the way we continue to expect to run it. I'd say, you know, we understand what CMS is trying to do and, you know, to address any, I guess, potential over-coding, for lack of a better word.

You did some, you know, with Privia, think about it's with us, you know, the diversity of revenue, you know, we probably, you know, this is a more significant risk for other companies that would tend to focus just on MA or something where RADV is, you know, a bigger portion of the top line. Again, I guess our balance of revenue and diversity is a differential for us.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Lisa Gill from JPMorgan. Your line is now open.

Lisa Gill (Managing Director and Senior Equity Research Analyst covering Healthcare Services)

Good morning. Thanks for taking my question. On the four new markets that you talked about, Connecticut, Delaware, North Carolina, Ohio, what's included in the guidance for 2023 as far as any of the key metrics, whether we think about attributed lives or physician count. Is there anything included or is that, you know, where you're gonna spend the $8 million-$10 million to bring those on and that's more of an opportunity as we think about 2024? Just trying to figure out what's in the guidance.

Parth Mehrotra (President and COO)

Thanks for the question, Lisa. We'll take them one at a time. For North Carolina and Ohio, we're actively recruiting new providers. We did not start with any. Given the five to six month lag in implementation, there's pretty de minimis contribution from those two markets in any of the KPIs. Very limited implemented providers, very limited lives, very limited practice collections, care margin, and so forth. Obviously, as we are spending those dollars, you should expect pretty significant operating leverage starting next year and beyond. In Delaware and Connecticut, we entered those markets, as we outlined in our prepared remarks, with attributed lives in both those states.

We are in value-based arrangements, so those are included in our attributed lives numbers. There are no providers in those two states today in the implemented provider counts. Again, we are gonna be actively recruiting in both of those states, and you'll see some operating leverage coming from the fee-for-service book in the future. There's some contribution from the value-based book and practice collections and care margin in those two states.

Operator (participant)

Thank you. One minute while I prepare the next question. Our next question comes from Joshua Raskin, Nephron Research. Your line is now open.

Joshua Raskin (Partner and Healthcare Research Analyst)

Hi. Thanks. Good morning. 2023 guidance, that includes, you know, call it 200-300 incremental attributed lives. I was wondering if you could just give some color on the categories. I think you gave us the MA, but just sort of where those lives are coming from. How do we think about that number in the future, just the gross number of incremental attributed lives, you know, sort of based on your pipeline and what you're looking at. Should we think of that as a relatively consistent number of patients that can convert over time? Should we think about that as sort of an, you know, an abnormal year or, you know, does it grow over time? Thanks.

Parth Mehrotra (President and COO)

Yeah, thanks for the question, Josh. If you compare our bubble chart on slide 12 to previous quarters, you know, you can see the growth year-over-year on those lives. We added Connecticut, and we added Delaware, and both of those came with 180,000 and then 12,000 lives respectively. You know, we made the appropriate disclosure, so you can see it's mainly MSSP, some commercial, and some MA in those two states. That's all included in the 1.1 million. There's also organic growth in the existing states as we've grown our provider footprint. There's some growth across all lines of business in lives from there.

Then to your second question, you know, we'll just take a judicious approach on when we move to downside arrangements. You've seen we've gone from 0 to 40,000 in two years here. It will not be a linear line. I think we just evaluate it year by year. In our model where we are sharing the economics 60-40 up and down with our physician partners, it's a joint decision, and we'll try and do it when we think it's profitable and successful to doing so.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from [Jailendra Singh] with Truist. Your line is now open.

Jailendra Singh (Managing Director and Senior Equity Research Analyst covering Healthcare Technology and Distribution)

All right, this is Jailendra Singh from Truist Securities. Thanks and good morning, everyone. Congrats on a good quarter and good guidance.

Sandy Draper (Senior Managing Director and Research Analyst covering Healthcare IT and Services)

With respect to EBITDA guidance, including approximately $8 million-$10 million in startup costs for new geographies and ACOs, I was wondering if you could share some color around quarterly cadence of those costs and any other puts and takes we should keep in mind as we think about the quarterly EBITDA cadence in general for 2023.

Parth Mehrotra (President and COO)

Thanks, Jailendra. I think you should expect the quarterly cadence to be pretty consistent with previous years. From an EBITDA perspective, our spend is pretty even across the year in different quarters, so it should not be materially different from 2022.

Operator (participant)

Thank you. One moment while we prepare the next question. Our next question comes from Andrew Mok of UBS. Your line is now open.

Jonathan Yong (Equity Research Analyst covering Healthcare Sector)

Good morning. This is Jonathan for Andrew. Do you have a target for converting a certain share of Privia Care Partners providers to fully implemented providers? Just trying to figure out the general progression you're expecting and whether converting those providers is the priority in the near term. Thanks.

Parth Mehrotra (President and COO)

Yeah, it is a pretty high priority. We have a good relationship with those doctors, and our hope is that they convert to the full stack. We have our internal targets, but obviously don't disclose that publicly. You should expect for us to target those 1,440 providers and over time, move as many of them to the full stack.

Operator (participant)

Thank you. One moment while we prepare our next question. Our next question comes from Ryan Daniels of William Blair. Your line is now open.

Ryan Daniels (Partner and Senior Healthcare Equity Research Analyst covering Healthcare Technology and Services)

Guys. Congrats again, thanks for taking the question. Quick one on the guidance. The implemented provider range is reasonably tight, you know, 12%-15% growth. If I look at the attributed lives, it's 23%-34% growth, a bigger range there. I'm curious if there's any nuances between those two metrics, you know, larger provider groups coming on with more patient panels or anything unique that it describes kind of the larger range on lives under management. Thanks.

Parth Mehrotra (President and COO)

Thanks, Ryan. One is the law of large numbers. It's a bigger number. Slightly wider range. You know, implemented providers, we have pretty good visibility given the five to six month lag. The range reflects that kind of visibility unless there's some quarter-over-quarter movements. In the attributed lives, you know, a lot of these products are PPO. Some of the attribution flows in even into late Q1, early Q2. That's the range where we have a little bit less visibility other than the capitated book, we just account for that in the guidance. Plus, we've entered some new states, so obviously as we are adding providers and that attribution flows in, it's just a bigger footprint.

We're giving ourselves a little bit of a latitude, from a broader range perspective.

Operator (participant)

Thank you. One moment while we prepare our next question. Our next question comes from Sandy Draper with Guggenheim. Your line is now open.

Sandy Draper (Senior Managing Director and Research Analyst covering Healthcare IT and Services)

Thanks very much. My question sort of echoes a lot of the earlier questions. Be curious, Shawn and Parth, and this is maybe a misperception on my part. It seems like the more the announcements recently have we been seeing, going towards Privia Care Partners with the then focus to switch those over to potentially full stack over time. I just didn't know if there's a focus from you guys where you're saying, "Hey, we can move faster." Obviously you're getting into new states, I think quicker than what you outlined at the IPO.

Maybe you're looking at it saying, "Hey, this new strategy, we can move faster, we can get into more new states, and we believe in the long term." Is the market saying, the doctor saying, "We would rather sort of dip our toe in the water, partner with you guys, and then we'll see about joining you full stack later?" I'm just trying to see, think about the you know, where the push is coming from because my perception is it's more the focus or more of the new signings are going light versus full. Thanks.

Parth Mehrotra (President and COO)

Thanks, Sandy. It's Parth. I'll start. Shawn can add. If you look at since the IPO, you know, we've as we showed on slide 9, we've added six new states. They've been consistent with our strategy to target medical groups, health systems, or Privia Care Partners, whether it's clinically integrated networks or ACOs. We are focused on all three. There's no particular focus on one or the other. As we outlined on slide 11, you know, our strategy once we enter is very, very consistent. We launch the full medical group, the full stack, do both fee-for-service, value-based care. I think the underlying operative strategy for us is to get very large scale as quickly as we can.

We think our scale is underappreciated. If an opportunity arises in Connecticut, where CMG is the largest clinically integrated network with 1,100 providers across 450 locations, you can just compare their size to any other business model out there, just in one state. Our model's flexibility allows us to partner with an entity like that and enter the state with an alignment with a large number of providers day one, and then launch the full stack behind it, and offer our full platform. I think the flexibility in the model allows us to pursue all, including health systems and including IPAs or CINs, and that's how healthcare is organized in different parts of the country.

I think the flexibility in our model allows us to pursue all, but there's no one particular focus on any one particular element.

Shawn Morris (CEO)

Sandy, just, I'll add one thing. As you would expect us, we're having both conversations when, you know, as you, I think you called it the lighter version, Privia Care Partners. I mean, we're and as Parth's last comment there, it's just the way healthcare is organized. We're having those conversations, you know, beginning to, you know, who would be interested and, you know, we wanna, obviously, we think the solution, long-term solution for us is to build single tax ID medical groups, but we wanna have these relationships, and we have those conversations upfront, and we'll do that over a period of time.

Operator (participant)

Thank you. One minute while we prepare our next question. Our next question comes from Jamie Perse of Goldman Sachs. Your line is now open.

Jamie Perse (Equity Research Analyst covering Healthcare/Medical Technology)

Hey, thank you. Good morning. Just a question on the MA profitability. Appreciate you sharing your savings from that in 2022. I think in the past, you've made some comments around MA being, you know, potentially more profitable than MSSP. Just curious how we should think about timing and how long it takes you to get to, you know, similar contribution to MSSP, if not above.

Parth Mehrotra (President and COO)

Yeah, thanks, Jamie. Appreciate the question. You know, that's a good comparison. We, in our most successful large ACO in Mid-Atlantic, are close to double digits in shared savings in MSSP, as we've reported, close to 10%. That's an open access product, PPO type. Obviously, in MA, in capitation, where you're handholding the patient a little bit more, you know, you should expect at least that we can get to that level over time. It won't happen overnight. It varies by geography, varies by our payer relationship and how our physicians perform. Over time, you know, at least that or exceeding that should be the target for logical purposes.

Our hope is as you can see, the contribution today is fairly de minimis. That's a pretty big source of operating leverage in our business model as we move these lives into capitation. Again, hopefully we'll see good progression over the years.

Operator (participant)

Thank you. One minute as I prepare the next question. Our next question comes from Richard Close of Canaccord Genuity. Your line is now open.

Richard Close (Managing Director and Senior Equity Research Analyst covering Digital and Tech‑Enabled Health)

Yes, thanks for the questions. Congratulations. I'm curious if you could comment on the reception of Ohio and North Carolina so far. As you think about entering new markets, is there any comments you can provide us in terms of how we should think of startup expenses based on the different models, something like Ohio and North Carolina versus, you know, trying to get Privia Care Partners people in Connecticut and Delaware on the platform? Just curious there.

Parth Mehrotra (President and COO)

Thanks, Richard. On the first part, you know, initial reception's pretty good. We're just getting started. Again, you know, this is a five, 10-year journey to go build big medical groups, 500,000-600,000 providers over time. Initial reception's been great. You know, we shared that photo bus ad in the triangle area, which is pretty cool. We think, again, we offer a very unique solution to providers that, as we stated in our prepared remarks, really wasn't available. I think there's a lot of education, but this is a solution that has a real need in the market, and physicians are realizing that this alternative exists in its entirety for them as an alternative to be employed, you know, anywhere.

So we think the reception's pretty good. Our partners are really excited and we're pretty full steam ahead. Secondly, you know, as we stated on slide 11, you know, our focus is to go and build a full stack, all our elements in every single state over time. If we are entering a state with a medical group or a health system, what may not happen day one is positive practice collections or care margin contribution because we have no doctors and no lives, and we are setting up the market, spending sales, marketing, implementation costs, leadership costs for that particular state. That's about the $2 million-$3 million number that we've stated previously.

We do exactly the same in a state where we might enter with a Privia Care Partners model, as an example in Connecticut. However, that state comes with attributed lives and some contribution, both practice collections and care margin day one on the value-based book. The level of spend is consistent. The only other factor I would say is the size of the state will have some impact on the level of spend. Obviously, you know, Delaware would be much smaller than Connecticut. Montana is much smaller than California and so forth. The strategy is pretty consistent and the level of spend, that $2 million-$3 million per year is fairly consistent.

Shawn Morris (CEO)

Yeah. The only thing I would add would be the, in those last two, we're hitting the ground with operators on the ground too. We've got some expenses because we have revenue day one.

Operator (participant)

Thank you. One minute as I prepare the next question. Our next question comes from Whit Mayo of SVB. Your line is now open.

Whit Mayo (enior Managing Director and Senior Equity Research Analyst specializing in Healthcare Providers and Managed Care)

Hey, thanks. This deal in Connecticut is a little bit unique with CMG. You're actually, I think, putting capital into this deal to acquire the ACO by the value-based care book. Can you maybe spend a minute talking about this transaction, the structure a little bit, what the split of the ACO is? Really the corollary to this question is, should we read into this transaction that you may be looking to be a bit more active with the balance sheet to grow and buy into some new and existing markets? Just wanted to take your temperature on the desire to be a little bit more active here.

Parth Mehrotra (President and COO)

Yeah, thanks, Whit. Our strategy has been consistent, you know, in any state, as we outlined, you know, we're establishing the medical group, the risk entity, and our services platform. There can be an opportunity for us to buy either of those three types of entities, and we've done that in the past. If you look at California, you look at West Texas, you now look at Connecticut, those are three different types of acquisitions. Small scale, but all three variety. I think as we look again in our flexible model to enter the remaining 38 states, given how healthcare is organized, we may come across entities that can get us a pretty strong foothold with a pretty large entity and a scale in a particular state day 1.

Could be a medical group, could be an established services platform, could be an ACO entity. With all the capital flexibility we have with close to $350 million cash, no debt, you know, like I said, we're kind of full steam ahead looking at these opportunities. Obviously, we'll be very thoughtful in doing so. Smaller is better for us. Don't wanna make mistakes. We'll be consistent with what we've been doing in the recent past.

Operator (participant)

Thank you. Again, as a reminder, to ask a question, you will need to press star one one on your telephone. One minute as I prepare the next question. Our next question comes from Jessica Tassan of Piper Sandler. Your line is now open.

Jessica Tassan (VP and Senior Equity Research Analyst covering Healthcare IT, Healthcare Delivery, and Technology-enabled services)

Hi. Good morning. Thanks for taking the question. I wanted to follow up just on the MA book. Can you help us understand the structure of the full cap contract? Should we continue to think about these as about a $625 or $650 PMPM for revenue? What kind of year two care margin ramp is implied in the 2023 guide? Thanks.

Parth Mehrotra (President and COO)

Yeah, thanks, Jess. The structure is fairly unique by payer and by geography. We don't break down the number of lives by geography or by payer. The PMPM should be higher than the amount you stated, just logically, in practice, you know, as in GAAP revenue. For practice collections, the PMPM should be much higher. Again, we're not breaking down care margin contribution, you know, you can see the number every quarter now, given our increased disclosure. Our hope is, from the de minimis level it's at today, that increases over time.

Shawn Morris (CEO)

Jessica, this is Parth mentioned it, but and we've talked about it in the past. I mean, these contracts tend to be somewhat bespoke. I mean, you know, we don't, we're not, we don't do just a flat 85% and take all the risk. We really focus on aligning with the payer. We believe the payer should have some risk. We believe we should have some risk. We believe the doctor should have some risk. We think that is the most sustainable model long term. You know, we sit down with them. We look at kind of where we have density, what payers are there, where we, you know, kind of what preferred type arrangements we'd like to have, and then we go at contracting in that manner.

It's, each one of them probably they're going to be unique just because of the nature, the nature of the market, the nature of the payers, and then kind of how we go about the business.

Operator (participant)

Thank you. At this time, I would like to turn it back to Mr. Morris for any further comments.

Shawn Morris (CEO)

Thank you for listening for our call today. Privia Health's capital efficient physician-enabled model continues to gain significant scale and market momentum as we can support all providers and all patients, all reimbursement models in uniquely different geographies. We look forward to continue to execute at a high level through 2023 and for years to come. We appreciate your continued interest and support of our company, and we look forward to speaking to you very soon again. Enjoy the rest of your day, and thank you.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.