Privia Health Group - Earnings Call - Q4 2024

Executive Summary

• All 2024 operating and financial metrics finished above the high end of guidance; Q4 revenue $460.9M (+4.6% YoY), adjusted EBITDA $24.9M (+44% YoY), and adjusted EPS $0.21 (+40% YoY) underscored operating leverage and disciplined execution.
• 2025 guidance embeds continued profitable growth despite MA/value-based headwinds: revenue $1.80–$1.90B, adjusted EBITDA $105–$110M (up ~16–22% YoY), EBITDA margin expansion, and ≥80% EBITDA-to-FCF conversion with de minimis capex and a 26–28% effective tax rate.
• Balance sheet remains a strategic asset: year-end cash $491.1M, no debt; 2024 free cash flow $109.3M (~121% of adjusted EBITDA) driven by strong operations and working capital timing.
• Management highlighted prudence on shared savings accruals (flat YoY assumption) and positive but small MA capitation contribution margins; outperformance could come if value-based results exceed conservative assumptions.

What Went Well and What Went Wrong

• What Went Well

  • Operating leverage: Adjusted EBITDA rose 44% YoY in Q4 to $24.9M with EBITDA margin of 23.1% (up 420 bps YoY) as platform and G&A scaled with growth.
  • Provider and life growth: Implemented providers +11.2% YoY to 4,789; attributed lives +12.1% YoY to 1.256M, underpinning fee-for-service and value-based momentum.
  • Management tone and model resilience: “We exceeded the high end of all guidance metrics for 2024,” and ended with $491M cash/no debt; “record $109.3 million in free cash flow… converting 121% of adjusted EBITDA”.

• What Went Wrong

  • GAAP profitability pressured by stock comp/other items: Q4 GAAP EPS only $0.03 (stock comp $15.3M; legal/other $2.5M) despite strong non-GAAP gains.
  • MA/value-based headwinds persist: 2025 guide assumes minimal YoY increase in shared savings accruals amid utilization, V28, Stars, and plan benefit changes; MA capitation only modestly profitable.
  • Mix shift headwind in capitation: Capitated revenue down YoY as PRVA proactively renegotiated contracts; management remains unwilling to expand full-risk exposure without fair economics.

Transcript

Operator (participant)

Thank you for standing by. My name is Luella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Privia Health Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Robert Borchert, SVP of Investor and Corporate Communication. Please go ahead, sir.

Robert Borchert (SVP of Investor and Corporate Communication)

Thank you, Luella, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer, and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed in the Investor Relations section of priviahealth.com, along with today's financial press release and slide presentation. Following our prepared comments, we will open the line for questions. We ask that 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 are preliminary and are not final until our Form 10-K for the year ended December 31st, 2024, 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 27th, 2025.

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. As a result, these statements should be considered along 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. Reconciliation of these measures to comparable GAAP measures is included in our press release and the accompanying slide presentation posted on our website. Now, I'd like to hand the call over to our CEO, Parth Mehrotra.

Parth Mehrotra (CEO)

Thank you, Robert, and good morning, everyone. Privia Health had a very strong 2024 on many fronts as we continue to execute well and drive growth across all our markets. This morning, I'll cover our 2024 performance and business highlights. Then David will discuss our recent financial results, capital position, and our 2025 guidance outlook before we take your questions. Privia's momentum extended across all aspects of our business as we exceeded the high end of all guidance metrics for 2024. Our growth team once again delivered an exceptional year of new provider signings in existing markets, which underpins our strong visibility through 2025. Implemented providers increased 11.2% year-over-year, which drove fee-for-service collections growth of 13.6%. Healthy growth and attribution and a continued focus on clinical performance improvement led to better-than-expected value-based care results despite the challenging Medicare Advantage environment.

Adjusted EBITDA was up 25.2%, with operating leverage driving margin expansion of 230 basis points year-over-year, despite continued investments in our newest markets. Privia also generated a record $109.3 million in free cash flow in 2024, converting 121% of adjusted EBITDA. We ended the year with $491 million in cash and no debt. Our balance sheet positions us with significant financial flexibility to deploy capital and take advantage of opportunities in the current market environment. Our business development pipeline is robust, and we are committed to pursuing disciplined growth that complements our organic sales engine in existing markets. Privia's outstanding performance in the current healthcare and regulatory environment is a testament to the strength of our unique business model, strong execution by our operating teams, and most importantly, exceptional performance by our physician partners in our high-performing medical groups and risk entities.

We are well on our path to building one of the largest primary care-centric delivery networks in the nation. Our large-scale, high-quality, community-based medical groups and risk entities have demonstrated proven success across 14 states and the District of Columbia. In these geographies, our footprint now comprises 4,789 implemented providers caring for over 5.2 million patients in more than 1,200 care center locations. Gross provider retention of 98% highlights the stickiness of our model and our provider satisfaction with the Privia platform. Likewise, our patient Net Promoter Score of 87 underscores the excellent patient experience being delivered by our medical groups. Privia now serves over 1.26 million attributed lives across commercial and government value-based care programs. The breadth of our contracts and geographic reach positions us as one of the most balanced and diversified value-based care organizations.

Total attributed lives estimated as of January 1st increased more than 11% from a year ago, driven by new provider growth as well as new value-based care contracts in certain programs. Commercial attributed lives increased 15.2% from last year to reach 782,000. Medicare Advantage and Medicaid attribution both increased almost 8% from a year ago. We continue to expect headwinds in Medicare Advantage over the next few years, given pressures from elevated utilization trends, phase-in of V28 through 2026, and changes in Star scores, among other factors. However, the diversification of Privia's value-based care contracts gives us confidence in our ability to build scale and profitability across the business despite challenges in any one particular program. We remain highly focused on generating positive contribution margin in our value-based contracts as we pursue attribution growth, manage risk, and implement clinical and operational enhancements in our partner practices.

Ultimately, our goal is consistent and sustainable earnings growth for our medical groups and shareholders year after year. Privia has delivered consistent growth and profitability and free cash flow across economic, healthcare, regulatory, and political cycles over the past seven years. The power of our business model and consistent execution is evident in how we have compounded all key metrics, including free cash flow over time. Since 2018, we have consistently expanded EBITDA margins and converted 105% of EBITDA to free cash flow on average. The midpoint of our 2025 guidance metrics demonstrates our expectations for another year of strong EBITDA growth despite significant headwinds in the current healthcare environment for value-based care. Now I'll ask David to review our recent financial results and discuss our capital position and 2025 guidance outlook in more detail.

David Mountcastle (CFO)

Thank you, Parth. Privia executed very well through the fourth quarter of 2024.

Our implemented providers grew 147 sequentially from Q3 to reach 4,789 at December 31st, an increase of 11.2% year-over-year. The growth in implemented providers, along with continuation of solid ambulatory utilization trends and value-based performance, led to practice collections increasing 4.7% from Q4 a year ago to reach $792.5 million. Excluding revenue from the renegotiated Medicare Advantage capitated agreements, practice collections increased approximately 12.4% year-over-year in the fourth quarter of 2024. Adjusted EBITDA, which is reconciled to GAAP net income in the appendix, increased 44% over Q4 last year to reach $24.9 million, representing 23.1% of Care Margin. This is a 420 basis point improvement from a year ago as we generated operating leverage across both cost of platform and G&A while investing across all markets.

As Parth noted, we exceeded the high end of guidance for all key operating and financial metrics for full year 2024. Practice collections increased 4.5% to $2.97 billion. Care Margin was up 12.4%, and adjusted EBITDA grew 25.2% to reach $90.5 million. The free cash flow generation of our business model further strengthens our healthy balance sheet as we ended 2024 with approximately $491 million in cash and no debt. With de minimis capital expenditures in 2024, free cash flow for the year was $109.3 million, or 121% of adjusted EBITDA, higher than previous guidance due to the timing of certain outgoing cash payments as well as prudent working capital management. Our initial guidance for 2025 is built upon strong 2024 provider signings and the diversity and resiliency of our operating model in the current healthcare environment.

In 2025, we expect to focus on the same core priorities that have driven our business to date. First, provider growth to increase density and scale in existing and new markets. Second, attribution growth and performance in value-based arrangements. And third, operational improvements and efficiencies that impact the bottom line. Using the midpoint of our 2025 guidance, implemented providers are expected to increase 9.6% year-over-year to reach 5,250 by year end, and attributed lives growth is expected to be approximately 7.5%. We expect practice collections growth of approximately 7.8% at the midpoint. This guidance assumes minimal increase in shared savings accruals year-over-year, given the ongoing challenges in the Medicare Advantage environment. We expect Care Margin growth of 8.9% at the midpoint, given minimal increase in shared savings accruals. We are also guided to adjusted EBITDA growth of approximately 19% at the midpoint.

EBITDA margin as a percentage of Care Margin is expected to expand approximately 200 basis points year-over-year as our operating leverage in more mature markets more than offsets new market entry costs. While we are maintaining a robust pipeline of existing market expansion and potential new market opportunities, our initial 2025 guidance assumes no new business development activity or capital deployment. Finally, we expect capital expenditures to be de minimis again this year as part of our capital-light operating model and are assuming an effective tax rate of 26%-28%. We are nearing the end of our net operating loss carry forward, so we expect to pay more for cash taxes in 2025. This should still lead to at least 80% of our full-year adjusted EBITDA converting to free cash flow.

Privia Health remains focused on building one of the largest primary care-centric delivery networks in the nation. We look forward to continuing to serve our physicians, providers, and health system partners and their patients while creating value for our shareholders for many years to come. Operator, we are now ready to take questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Sameer Patel (VP of Equity Research)

Hi guys, this is Sameer Patel on for Elizabeth Anderson. Congrats on the strong quarter and the solid guidance here. I just wanted to ask about the OpEx line. It looks like you're increasing OpEx based on your guide by only about $300,000 year-over-year. Can you just help us understand and break out the leverage between sales and marketing and G&A? Is sales and marketing expected to be maybe down year-over-year, just given the fact that there's no new market entry costs? Or how should we think about this?

Parth Mehrotra (CEO)

Yeah, thanks, Sameer. Yeah, I think you're seeing the scaling of the cost structure. We added one new market last year, and the sales infrastructure spend happens right at the outset. So I think our guidance does not assume any new markets, any business development activity. If that happens, we'll update the guidance. But other than that, our job is to continue to scale the cost structure between G&A and sales and marketing. We are fifth year as a public company, and you should expect that. And so you're seeing the operating leverage play out really nicely. So that's one of the key levers to drive EBITDA growth.

Operator (participant)

Your next question comes from the line of Andrew Mok with Barclays. Please go ahead.

Andrew Mok (Director)

Hi, good morning. The cash on the balance sheet is now approaching $500 million. Hoping you could provide a bit more color on the M&A pipeline. And are you diligencing a lot of opportunities and passing on them, or just haven't seen any opportunities that are thus far? And then relatedly, are there any uses of building cash, if not M&A? Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Andrew. So yeah, you can expect us to look at everything in the space. We have 23 analysts covering us. You can expect we have 23 plus bankers covering us as well. And so given our strong financial position in this environment in our space, we're looking at all transactions that come across the table. As we noted, the pipeline is really robust. However, we're going to be disciplined. It's been a pretty tough environment out there for value-based entities and a lot of revisions in estimates and performance, both publicly, as you've seen, but also in the private markets. So I think it's just finding the right opportunities. We'll continue to be very aggressive, but very disciplined in how we pursue those and take advantage of the situation.

But you should expect us to deploy the capital, enter new states, increase density in existing states. We've said previously we're looking at medical groups, risk entities, MSO entities. Given our model, I think we can be very flexible. So we'll continue to look for opportunities to deploy capital to create shareholder value, and that remains the primary focus. Obviously, the strong balance sheet also helps us have sufficient capital to prepare for any unseen risks that might come, regulatory changes, and so on and so forth to support our medical group and risk entities. So that's a big part of the capital that we have. So I think it puts us overall in a very strong financial position. And then ultimately, if the stock price deviates fundamentally from what we think is intrinsic value, we have the option to return capital to shareholders as well.

Operator (participant)

Your next question comes from the line of Josh Raskin with Nephron Research. Please go ahead.

Josh Raskin (Partner for Managed Care and Providers)

Yeah, thanks. Good morning. So it seems as though other companies in the sectors, I think, are looking maybe to sort of evolve their business models and take less risk, especially in their initial contracts with providers and plans. I heard one competitor speak to a glide path to risk. Now it sounded very familiar. So I guess my question, does that help Privia as plans and providers are getting more used to that sort of, as you guys talk about this path to risk methodology, or do you think that puts competitors on sort of better footing now? And then I just wanted to make sure I heard just a follow-up. Did you say you were generating positive contribution margin from your MA risk contracts still? And if so, how's that?

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Josh. So take them in order. So on the first one, look, I think we've been very consistent since five years that we've been public that you have to distinguish between the willingness to take risk and the ability to take risk. We've always had the ability to take risk. We do so at the highest level in MSSP, as you know. We do capitation in MA with a small book. I don't think providers wake up every day saying, "We want to do full risk." I think there's a lot of noise in the space by entities that jumped into full risk. And I think it's a misconception that to perform well in value-based care, to perform well in MA, you necessarily need to take full risk.

We've always said we prefer models where the payer has skin in the game, an entity like Privia that's enabling has skin in the game, and the doctors have skin in the game, or the medical groups and the risk entities have skin in the game, and we share it upside and down, and I think that keeps everybody honest, so I just think it doesn't change our position in the marketplace. I can't speak for competitors. I think they've learned a hard lesson. Ultimately, our job is to take as much risk that pays us and pays our medical groups and risk entities by the payers to assume that risk. I don't think we're not trying to do venture capital in public markets. You don't need to lose money to do all this good work.

If we don't come across a fair contract from a payer that compensates our medical groups for the work that they're doing, we're not going to take downside risk. It's pretty much simple. I think the providers appreciate that and actually respect that glide path. So I don't think it changes our position. In fact, I think it validates our approach and makes our position much stronger. Then secondly, on the MA book, yes, as you can see from the disclosure on our press release, we made a small, about 2% gross margin on the capitated book. We'd said last year we had renegotiated a couple of contracts at the beginning of last year, much ahead of the curve. The one that we remained, we were hoping that we'll make money, and we're glad that we performed really well.

It was better than expected, and that led to some of the outperformance and the results that you see. And that's our hope that if you're taking downside risk, the objective is you do it to make money. It's pretty binary at the end of the day.

Operator (participant)

Your next question comes from the line of Whit Mayo with Leerink Partners. Please go ahead.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Hey, thanks. I just wanted to hear more about the factors influencing the flatness this year in shared savings. I don't know if this is all just V28, the respectfulness that you have around utilization and cost trends. But are there any other changes with the benchmark methodology that's concerning you? And then I'm wondering, in the event that ACO REACH doesn't get extended or sunsets, is this a thing that could be potentially good for you with new groups that may be looking to affiliate with your platform?

Yeah, thanks for the questions, Whit. So look, I think we've taken a pretty prudent approach the last couple of years, just given all the factors we outlined, whether it's utilization trends, V28, Star scores, benefit design changes, so on and so forth, and it's across the book. I think our guidance assumes prudence that we won't grow shared savings meaningfully year-over-year. We were able to do so. We had the same assumption last year, and then we outperformed, and that led to better-than-expected results, so I think we're adopting the same approach. This guidance does not assume any meaningful step up in shared savings, and if we are wrong, we're hoping that there's upside than downside, as you've consistently seen with our results over the past five years, so I just think it's that. It's across all the programs. Utilization hurts us if you're taking risk.

We've said you got to manage that risk. So I think it's more prudence across the board versus any one particular program from that perspective. And then to your second question, yeah, as you know, CMS obviously allows a risk entity or a tax ID medical group to choose between MSSP or ACO REACH today. So we think there'll be convergence over time in some of these programs. MSSP has done really well. REACH is in this initial stage. And if that sunsets, I just think providers ultimately are managing patients and their spend and would like to get paid for doing that good work irrespective of the program. So ultimately, I think of this convergence, we'll hopefully tend to benefit or capture some of that volume. We don't do REACH today because we think we perform really well in MSSP.

And if in all our ACOs or states, we've chosen to continue to add attribution in MSSP because we think that's the better outcome to save dollars for the government, taxpayers, perform well for our medical groups and risk entities. And if there's convergence, I think it'll just validate our position even more.

Operator (participant)

Your next question comes from the line of Jailendra Singh with Truist Securities. Please go ahead.

Jailendra Singh (Managing Director)

Yeah, thank you. And good morning, and thanks for taking my questions. And congrats on the good quarter. I wanted to follow up on higher-than-expected EBITDA to cash growth conversion in 2024. You guys called out certain outgoing cash payments, maybe provide a little bit more color there. And is this the reason why you are expecting the conversion at 80% this year compared to like 90% you expected heading into 2024?

David Mountcastle (CFO)

Yeah, thanks for the question. Yeah, it's really just sort of the timing of payments and where the liabilities in the cash ended up at the end of the year. I would say next year is really driven more based on the fact that we run out of some of our NOLs, and we're going to have to start paying some taxes next year. And that's really going to decrease the percentage. So might it next year have been a little bit higher than 80% without the great year this year, perhaps? But we feel very confident in our 80% guidance.

Operator (participant)

Your next question comes from the line of AJ Rice with UBS. Please go ahead.

AJ Rice (Managing Director)

Hi, everybody. When I look at your guidance, EBITDA, you're expecting within the range is sort of 16%-22% growth. I know every year there's puts and takes. I wondered if you would comment on what do you see as some of the key variables that will move you around within that range, and is there anything that's different because you're heading into 2025 from what you normally see? And if I could squeeze in a variance on that, anything in Washington with all the uncertainty, I don't perceive you've got a lot of things at risk there. But anything you're looking at that they're discussing that could be an opportunity or a challenge for you?

Parth Mehrotra (CEO)

Yeah, I appreciate the questions, AJ. So on the first one, look, for context, our guidance is very, very narrow. It's a $5 million range. That underscores the predictability and the consistency of our model. And so it's not a big range from a dollar perspective. And then there's nothing new this year than it's pretty much rinse and repeat. The variables are the same. We have a very predictable fee-for-service book. We've sold a lot of the providers that will get implemented already. As you know, there's a five, six-month lag. And so the fee-for-service book is extremely predictable. The only source of variability is the value-based book. And that's actual performance versus our accruals. And you've seen from our track record, you can see slide seven, seven-year track record that we've been pretty consistent with our accruals.

We follow the same methodology, as I alluded to in the answer to the previous questions. So I think that's going to be the only source, and that's why you have the range. If the value-based book performs better than expected, then like last year, hopefully, we'll be at the add or above the high end of the range. And if not, then we have the range. So that's pretty much underscores that narrow guidance. On your second question, look, I don't think there's anything specific with our model supporting community-based physicians. It's the lowest cost of setting in healthcare. The administration in its first term was really supportive of all the programs we are in. We don't expect them to change that. And so there's nothing currently that we've heard that impacts our results. If something changes, obviously, we'll let you know.

But I think we'll continue to get good support from CMS here for all the programs that we participate in.

Operator (participant)

Your next question comes from the line of Jack Slevin with Jefferies. Please go ahead.

Jack Slevin (VP of Equity Research)

Hey, thanks for taking the question, and congrats on the really strong print. Pretty simple one for me here. I guess just want to zero in on the Care Margin guidance. And running quick numbers, it looks to me like it's taking in a 6% drop in a sort of simplified view if you just look at Care Margin per average implemented provider. And I know that doesn't take all the moving pieces into account. But maybe just considering that, what are the scenarios you guys think you'd have to look at to upside the Care Margin and the EBITDA guidance for the full year? Thanks.

Parth Mehrotra (CEO)

Yeah, good question, Jack. So it's predominantly the flat assumption in value-based care shared savings. So that's one factor. And the other is the mix between physicians and APPs and nurse practitioners. So that impacts it a little bit given our scale, but not too much. And then obviously the mix between primary care, peds, OBs, and then specialists, and then how that flows down into Care Margin from practice collections. So I think overall, we're looking to increase operating leverage down to EBITDA and free cash, and you can see that increasing pretty well. But I think that's mainly driven by the first factor, which is if shared savings assumption is flat, and as you know, our take rate is 40% on every dollar of shared savings, that is leading to that outcome. Hopefully, we'll get leverage in future years as that improves.

Operator (participant)

Your next question comes from the line of Jeff Garro with Stephens Inc. Please go ahead.

Jeff Garro (Managing Director and Equity Research Analyst)

Yeah, good morning. Thanks for taking the questions. Thought maybe we'd check in on the Care Partners Program and just curious how provider interest has trended in that model. And similarly, where previous level of interest is in not requiring providers to switch electronic health record systems to join the Privia Platform. Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question. So I think that's progressing well. As you know, we bought Community Medical Group in Connecticut, which was one of the largest IPAs. And that's a state where we're starting to implement providers on the same technology stack, but a large portion of those are not on the platform yet. I think over time, our hope is we'll migrate as many of our providers onto the same tech stack into our medical groups. But that's a good lever for us to continue to expand, get attribution, perform in value-based care, and over time, get providers on the integrated stack. So I think it's performing pretty well as we had expected. It's all embedded in the results. We don't break it out. It's part of the core business. And so I think it's gone pretty well as planned.

Operator (participant)

Your next question comes from the line of Matthew Gillmor with KeyBanc. Please go ahead.

Matthew Gillmor (Director and Equity Research Analyst)

Hey, good morning. Thanks for the question. I wanted to ask about the Physician Fee Schedule. I don't think Congress addressed the cut that started this year. At this point there are obviously a lot of moving pieces, but can you talk about how you're thinking about the impact for 2025 and whether anything has changed in your outlook as the year has gone on?

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Matt. So I mean, we've embedded our best estimate into the guidance with whatever puts and takes. I think we have a lot of offsetting factors in there too. So it's nothing material that we like to call out. And if it's better, it's better. I think, look, our fundamental value proposition just does not change with that particular variable. If anything, all of these pressures further validate the need for providers to join a very large integrated medical group risk entity and the value prop that Privia has to offer. So I think nothing fundamentally changes either way.

Operator (participant)

Your next question comes from the line of Richard Close with Canaccord Genuity. Please go ahead.

Richard Close (Managing Director of Digital and Tech-enabled Health Equity Research)

Yeah, congratulations. Thanks for the question. Maybe digging into Washington a little bit more. Specifically, Parth, how do you think about maybe the level of uninsured increasing if subsidies go away and then the potential changes in Medicaid? How does that impact your business? Obviously, it would be more 2026, but just thoughts there.

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Richard. So as you know, we don't have a big Medicaid book. We have about 97,000 lives in some value-based programs. Our mix represents the demographics in each state across our 14 states and DC. So it's pretty diversified. Same with the uninsured. So I think we'll just see we went through the whole Medicaid redetermination, and you saw we can capture some of those patients and lives into other parts of the book, whether it's commercial, MA, duals, whatever it is, on the individual exchange. So I just think it depends on how it all plays out, what the impact is. Do patients actually move in a particular direction, and that'll be, again, state by state. So it's just tough to predict, but we don't have big exposure to Medicaid or to the uninsured yet.

Operator (participant)

Your next question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Jack Senft (Equity Research Associate)

Yeah, hey, guys. This is Jack Senft for Ryan. Congrats on the strong year. I know you called out the cash balance, where you can use some of that to help enter new markets and build density, and your guide does not include the new market entries, but is there any one area that you're targeting more or that you should see more growth from, like whether it is entering new markets versus say market growth? Just kind of curious what your mindset is and kind of parsing out the difference there. Thanks.

Parth Mehrotra (CEO)

Yeah, thanks, Jack. So look, I think all the sales and marketing expense for existing markets is fully expensed in the P&L. So I think you're seeing the power of the platform in that we can continue to grow organically in existing states pretty well without deploying capital. I think in existing states where we could use capital is to just double down or increase density if there are opportunities that arise. And that's very value accretive because we already have an infrastructure. And then a lot of capital, obviously, predominantly the business development is getting into new states, which we've consistently done over the past, as you can again see on slide seven, we've consistently added new states every year. And then we've absorbed any incremental costs within our guide. I think that's pretty important to also underscore.

So I think if you look at some of the years like 2022, 2023, we continue to absorb a lot of those costs within the guide that we gave. So I think our guidance is pretty prudent, assuming no impact of BD. Obviously, if we deploy significant capital, that'll come with incremental collections, Care Margin, EBITDA. Some will flow this year. Some will flow next year. So we'll just see when we can get those deals done. And if and when that happens, we'll update guidance. But I think this guidance does not include any impact.

Operator (participant)

Your next question comes from the line of Matt Shea with Needham. Please go ahead.

Matth Shea (Analyst)

Hey, thanks for taking the questions and congrats on a strong close to the year. I guess kind of as a follow-up to the last question, it was great to hear earlier this year that 70% of the new provider pipeline is coming from referrals, pushing down CACs and payback periods. So now that referrals have reached this level, is this changing your philosophy at all? New market expansion versus stepping on the gas to go more in existing markets? And maybe as a follow-up, as we think about new markets like Indiana, how long does it take for the referral flywheel to get going?

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Matt. So on the first one, look, we're going to be aggressive everywhere, existing states, new states. Just given the business model is very proven, the unit economics are really proven. We know what to do, how to do it. We have the capital, so I think you'll see us pursue both. We're going to step on the gas in every which way to just continue the flywheel, and then each market evolves. Those conversion rates are in the most mature markets, as you would expect. Some of the new markets, I think that takes time to develop, so I just think each market evolves over time. I think we can have referrals across markets too. We can have bigger groups join us as they hear about the success story of their colleagues in other states.

So I think we're pursuing all aspects, all levers to continue to grow and scale the business. You're seeing that in the results. Despite challenging value-based environment, we're continuing to grow, to grow EBITDA, to grow free cash all the way down to the P&L. So I think that's just reflective of how this is playing out, and we're pretty proud of the accomplishment.

Operator (participant)

Your next question comes from the line of Ryan Langston with TD Cowen. Please go ahead.

Ryan Langston (VP of Healthcare Research)

Thanks. Good morning. In the 2025 guidance, providers, it looks like expected to grow around 10%, but lives around 7.5% year-over-year, I guess, despite kind of the strong 2024 provider pickup. For 2024, actually, the lives growth was over the provider growth. So just wondering if that's an expectation of a slower ramp-up of lives once you get those providers onboarded or anything else going on there? Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question. I mean, it's a wider range this year from 1.3-1.4 million lives. So at the high end, it's 11.5% growth. We'll just see how it plays out. It's law of large numbers are playing out. So I think the numbers you reflected were at the midpoint, but we'll just see how it plays out. It's also influenced by we're building multi-specialty groups. And so primary care to specialty mix influences that a little bit as the attribution predominantly happens with PCPs, as you know, and then to some extent with OBs and peds. But I think it's a broader range. So we'll just see how it plays out. But usually, it kind of is pretty consistent with provider growth.

Operator (participant)

Your next question comes from the line of David Larsen with BTIG. Please go ahead.

David Larsen (Managing Director)

Hey, congrats on the good quarter and the great year. Did I hear you say there's no new market entry costs in the guide for 2025? And why not? You usually enter a couple of markets. You got a bunch of cash on the balance sheet. And then also, did I also hear you say that the gross margin for cap revenue is 2%? It's great that it's positive, but that still sounds kind of low, right? I would assume a negative EBITDA margin if the gross margin is 2%. Why not just sort of exit those contracts? Thanks very much.

Parth Mehrotra (CEO)

Yeah, thanks, David. So on the first one, yeah, just to correct, the guidance assumes no incremental new markets. We obviously entered a few new markets over the last couple of years. So those are still we are investing in those, as we noted in our prepared remarks. And all of those costs are fully embedded in the guidance. And then I think if you refer to page 10 of the press release, you can see we break out the capitated revenue and then the total claims incurred. So you can see that we actually generated a positive contribution margin in that book. So that's what we were alluding to.

Operator (participant)

Your next question comes from the line of Adam Ron with Bank of America. Please go ahead.

Adam Ron (VP of Equity Research)

Hey, thanks for the question. I'd like to unpack more of the shared savings commentary you gave, particularly on MSSP. And so you mentioned in 2024, you had initially expected minimal accrual increases for shared savings, but then it ended up coming in better. So first, was that more so on the 2023 true-up, or was that based on what you're accruing for 2024? And then second, it'd be helpful if you could share somewhat directionally what you're seeing on trend for MSSP in 2024 and how that compares to what people are saying in ACO REACH is like a high single-digit trend. And is that what you're kind of assuming in 2025, if you're assuming similar trends continue in 2025 versus 2024 accruals. Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question. So look, I mean, we don't obviously give guidance by year and by accrual versus actual. But in general, it's a combination of both. So in every year, we are truing up accruals versus actual performance for the previous year as the results come in and then adjust our accruals in the current year based on the data we see. So that's fundamental to the question you asked. Our methodology is the same. Our assumptions are the same that we want to be very prudent with the trends we witness. If we are wrong, we hope that there's positive upside versus negative downside. That's how we look at when we guide. And so I think the outperformance was, again, a combination of 2023 versus 2024. There was some prior period stuff. There was some in-year stuff. It balances across different lines of business.

We got commercial. We got MSSP. We got MA. So there are puts and takes across all that balances itself out, and we're adopting the same approach this year. Yeah, I can't specifically comment on trend in reach versus MSSP. It's really by geography, by book of business, by state, based on regional benchmarks, how they change, so on and so forth, HCC trends in those states. And so we're just looking at the data that we get from CMS each quarter, each rolling quarter, and that influences true-ups on versus how we accrued for in prior periods and then how that informs us for adjusting accruals in the current year. So it's a pretty dynamic exercise. I mean, our healthcare economic teams, data analytics teams just does a fantastic job with a pretty large book.

I think you've seen that very consistently with our results over the last seven years. I mean, slide seven just speaks for itself. So I just think we're going to keep following the same approach and just see how it plays out. And the diversification of the book really helps us mitigate any puts and takes in any particular state or any particular program.

Operator (participant)

Your next question comes from the line of Michael Ha with Baird. Please go ahead.

Michael Ha (Senior Research Analyst)

Thank you. Just wanted to follow up on that last question. So on MSSP, I guess specifically CMS published their Accountable Care Prospective Trend for 2023 to 2024. And I know everyone's saying it's significantly below emerging trend, right? ACO REACH, like you just mentioned, but you sound very confident based on what you're seeing internally. Does that mean what they publish for the ACPT is in line with what you're actually seeing for your own ACOs? And I guess, how does it impact your 2024 performance accruals? And is there any potential go-forward risk if rates do remain understated versus trend? Or I'm guessing maybe it's more in line than what people are assuming. Thank you.

Parth Mehrotra (CEO)

Yeah. So I think it's important to recognize the ACPT impact is on newer ACOs, not older ACOs. So I think there's some of that that you have to factor in. We have, I think, one new ACO that's impacted a little bit just given the gestation of these ACOs over time. So again, our book is very diversified. All those trends are factored into the guidance. Then it's our relative performance versus the benchmark. The ACOs rebase every five years. So that happens over time with our different ACOs. I mean, we've been in the program 10 years. So I think we just have a methodology that we follow. We look at the balance book, and we embed all that in the guidance. And then we hope that we're right and there's a track record. So I don't think it fundamentally changes what we've done.

If there are puts and takes, we absorb it and then try to outperform based on good clinical performance in our practices and other levers that we can pull, and so I think we're not doing anything different than we've done in past years.

Operator (participant)

Your next question comes from the line of Constantine Davides with Citizens JMP. Please go ahead.

Constantine Davides (Managing Director)

Thanks. Parth, there's a number of competing medical group strategies out there in the marketplace that just haven't been as successful as yours. How much is technology a differentiator or enabler for you in supporting your growth in terms of just leveraging the Athena backbone? And I'm assuming now being one of their largest partners in terms of driving your ability to scale quickly but efficiently at this pace across, as you mentioned, a pretty diverse set of providers, states, payers, etc.?

Parth Mehrotra (CEO)

Yeah. Thanks, Constantine, for the question. I think it's a great question, but it's much more broader than just the tech stack. I think how we've differentiated ourselves, we've been saying this for five years since we were public, there are not too many entities that are creating integrated medical groups, risk entities, and a full tech and services platform altogether in one shop. Having providers join an integrated medical group on the same platform with the same governance structure where we are deeply embedded in the workflows, deeply embedded from a technology standpoint, not only just an EMR and RCM, but everything you build on top of that, and then having a risk entity that is fully embedded and is supporting that medical group to take risk. And we are seeing the data day in, day out across all lines of business. That's a very unique model.

I don't think other models are this deeply embedded in the workflow. I think you've seen how that impacts performance. They are relying on payers. They're relying on a very light layer on top. They don't have the governance, the deep governance that we do. So I think it's the combination of those elements of our business model and then, obviously, the embedded technology stack that allows us to really work very closely with our practices, organize them in small pods, and influence results. So I think it's all those factors that we have fundamentally built this business in a very thoughtful manner from day one. And you're seeing the fruits of that in empirical results over seven, eight years. A lot of companies went public. There are a lot of private companies out there that got funded.

It's very easy to just go take risk on a few lives and support practices in a very light manner. I think that just plays itself out as you're seeing as this industry evolves. I think it's probably a very thoughtful question if you just look at the results that we've produced consistently over seven, eight years that you can see publicly now that demonstrate the validity of this business model. I think it's a combination of all of those factors. That's why providers choose us given that strong value proposition.

Operator (participant)

Your next question comes from the line of Daniel Grosslight with Citi. Please go ahead.

Daniel Grosslight (Senior Research Analyst of Healthcare Technology)

Hi. Thanks for taking the question. On your capitated book for 2025, are you still assuming around a 2% contribution margin, or should we expect some improvement there? And then as we think about capitation, full cap in 2026 and beyond, it does seem like rates, the advance rate was, it was good, and maybe some room for improving that as it goes to final. It seems like bids have been a bit more rational this year. So curious how you're thinking about capitation also in 2026 and beyond.

Parth Mehrotra (CEO)

Yeah. I appreciate the question. So obviously, we don't break out guidance in any particular program. As we've consistently said, we are in a particular program, and we are doing some capitation with the hope that we'll have positive contribution margin. I think it's tough to predict whether it'll be the same repeat from last year. I think we're going to be prudent in that book. The environment continues to be challenging, as we alluded to, with all the factors. So we'll see how it plays out in this year. If we are in it, we are hoping we'll make money. We'll just see how it plays out during the course of the year, and then on the broader question, look, I think this goes back to the first or second question that was asked.

We continue to distinguish in our minds this need to take full risk and capitation to do well in MA. I think fundamentally, we think a shared risk methodology with the payers where everybody's interests aligned is the right model. We have the ability to take as much risk. I just don't think the payers, given the pressures they are facing, will hand over contracts that are slam dunk for provider groups just to assume full risk and make money in this environment with all those factors. I mean, you've seen every payer go through their results and all the pressures. So it's pretty well documented by all of you on the call. So I don't think you should expect us to ramp up our capitation book.

I think if there are opportunities where we can do so, where we see a good risk-reward ratio and there's a fair payment for us to assume that risk, we will. Otherwise, our preference is to share the risk with the payer across all aspects of the book, whether it's Part D, it's Part C, it's PCP spend, specialist spend, inpatient spend. I think we take as much risk as we can in the things we control. And if we don't control certain things, then we're not going to take risk or share it with the payer. But our hope is if we are taking risk, we're going to make money. Otherwise, there's no need to take risk. We're making money for the payer. We're making money for our medical groups. We're making money for our shareholders. So it's a pretty simple concept.

At the end of the day, again, it's a very binary outcome.

Operator (participant)

Your next question comes from the line of Jessica Tassan with Piper Sandler. Please go ahead.

Jessica Tassan (VP and Senior Research Analyst)

Hi, guys. Thanks for taking the question. So this one's maybe for David. Can you just help us understand why the 4Q upside to the high end of the implied Platform Contribution guide didn't see more of a kind of complete flow through to adjust the EBITDA upside in 4Q? Were there any one-time items in OPEX? And I guess just why wouldn't the Platform Contribution upside be really high incremental margin and drop kind of straight through to EBITDA? Thanks.

David Mountcastle (CFO)

Thanks, Jess. Relatively complicated question, I think. I think what you're asking is, why is the EBITDA increasing greater than contribution margin and Platform Contribution? If that's the case, it's due to how our sales costs and our G&A costs run through for the year. And again, both of them were, I would say, positively or negatively impacted, depending on how you want to look at it, from how we did for the year. So I don't know if I 100% answered your question. You asked a lot in there. So if not, we can follow up after.

Parth Mehrotra (CEO)

Yeah. Jess, I think we had a great sales year. So obviously, the sales costs in Q4 were higher as we drew up commissions. And then the company did pretty well. So some of the bonus accruals are higher than originally anticipated.

So all that kind of just gets factored into EBITDA versus Platform Contribution.

Operator (participant)

Your next question comes from the line of Tao Qiu with Macquarie. Please go ahead.

Tao Qiu (Equity Research Analyst)

Hey, thank you. Just to continue on the point about your willingness to take risk. Looking back in 2024, you renegotiated some MA contracts, and your HCC share of total collection came down 7% versus the previous year. Parth, I think you mentioned that the HCC environment remains challenging out there, and MSSP is expected to be flat. Any changes contemplated to any of the at-risk MA contracts you have today? Should we expect the mix shift to further decline towards FFS? And if so, it would be helpful to size up any potential decline in the mix, active or passive. Thank you.

Parth Mehrotra (CEO)

Yeah. I appreciate the question. So yeah, we don't anticipate any changes. We renegotiated whatever we had to beginning of last year. We are continuing with the capitated book we have. It's a pretty small piece of the business. Like we said, we're solving for positive contribution margin. And you have to recognize, I mean, just going from full risk to partial risk, it's all revenue recognition. The doctors don't go anywhere. The lives don't go anywhere. Our ability to manage those lives does not change. So that decline was fundamentally the way top line gets recognized if you take full risk versus you don't take full risk. So we're solving for positive Care Margin, positive contribution margin, positive EBITDA, positive free cash flow. But there's no change contemplated for the book we have today.

Operator (participant)

Your last question comes from the line of Craig Jones with Stifel. Please go ahead.

Craig Jones (Associate VP)

Hey. Thanks. Thanks for letting me ask a question here. So I wanted to hit on free cash flow conversion. You've been over 100% for the last handful of years here. You got into 80%, I think, from a combination of working capital maybe and then starting to pay cash taxes. So as you look at maybe more in a normalized year where you're full cash tax and let's just say no working capital, where does that conversion kind of shake out? Thanks.

David Mountcastle (CFO)

Yeah. I mean, it's going to kind of shake out, I would say, close to the 80%. As we get rid of all of our NOLs, it's probably going to shake out a little bit lower than that if we don't take into account any working capital adjustments. So I would probably say in the 70%-80% range is sort of a final resting place, assuming no working capital adjustments.

Operator (participant)

We do not have any more questions at this time. Gentlemen, you may continue.

Parth Mehrotra (CEO)

Thank you all for listening to our call today. We appreciate your continued interest and support of Privia and look forward to speaking with you again in the near future.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.