Q2 2024 Earnings Summary
- Privia Health has a strong cash position with expected cash of $425 million to $450 million by the end of the year and no debt, enabling it to pursue business development opportunities to expand into new markets and increase provider density, aiming to become a national company. The company converts over 80% of EBITDA to free cash flow, which is 2x the next best comp in the industry.
- Privia Health is progressing towards its long-term EBITDA margin targets of 30% to 35% EBITDA to care margin, currently achieving about 22%, and operating at target margins in its most mature markets when adjusted for new market investments. This demonstrates strong underlying profitability and scalability of its business model.
- Privia Health has a unique and differentiated business model, building dense, payer-agnostic medical groups across geographies, deeply embedded in workflows. This allows effective management of approximately 0.75 million lives across commercial and government payers. The company generates diversified revenue streams, including care management fees and shared savings on top of fee-for-service management fees, positioning it for continued growth and differentiating it from competitors.
- Fee-for-service collections per provider have been flat over the past few quarters, indicating potential stagnation in revenue growth per provider. This could be due to recruiting lower revenue physician groups or a mix shift towards providers like APPs and NPs who have lower collections per provider.
- Elevated inpatient utilization trends downstream may pressure margins and affect performance in value-based care arrangements. The continuation of these trends could impact the company's financial results adversely.
- The company's stock-based compensation expense has significantly increased, up 80% year-to-date, with a full-year expectation of $55 million to $60 million. This substantial rise could negatively affect profitability.
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Capital Allocation Priorities
Q: How will you allocate your cash given over $400 million and no debt?
A: Management plans to utilize the cash primarily for business development transactions, such as entering new markets or expanding in existing ones by acquiring medical groups or MSOs. They also aim to maintain a reserve for unforeseen events and may consider returning capital to shareholders if the stock price materially deviates from intrinsic value. -
Risk in Value-Based Contracts
Q: How are you approaching upside/downside risk contracts given market changes?
A: Privia continues to take downside risk in the Medicare Shared Savings Program (MSSP) and commercial contracts, with 76% of MSSP lives in the enhanced track with maximum risk, and 38% of commercial lives in upside/downside arrangements. However, they are cautious with Medicare Advantage due to the challenging environment, and will dial up risk when adequately compensated and as payers adjust to utilization trends. -
EBITDA Margin Progression
Q: Can you discuss EBITDA margin progression and long-term targets?
A: The company maintains long-term EBITDA margin targets of 30% to 35% of care margin. Currently at about 22%, they are progressing towards the target while investing in new markets. Mature markets are already operating at the target margin profile. -
New Market Expansion Plans
Q: Have you adjusted your new market entry plans?
A: Privia aims to enter 1 to 2 new states each year, though timing can vary. They continue to pursue opportunities to expand nationally and build density in existing markets, leveraging their strong cash position to act aggressively yet thoughtfully. -
Commercial Risk Contracts
Q: Are you offering value-based contracts directly to employers?
A: Yes, Privia has initiated pilots with self-insured employers in markets with significant provider density. They are well-positioned to offer such solutions due to their comprehensive care delivery networks and expect this to develop over the next few years. -
Utilization Trends
Q: What are you observing in utilization trends?
A: Ambulatory utilization remains high, benefiting the fee-for-service business and patient engagement. Elevated inpatient utilization persists, but their diversified value-based care book is balanced, and financial results reflect their ability to navigate these trends. -
MLR Improvement in MA Book
Q: Can you explain the improved MLR in the capitated MA book?
A: The Medical Loss Ratio improved from 99% to 95% due to restructuring Medicare Advantage contracts to protect EBITDA margins. They continue to perform well despite elevated utilization trends. -
Competitor Behavior
Q: Are competitors' behaviors changing given market dynamics?
A: Management notes significant disruption among competitors, with some facing financial challenges. This disruption benefits Privia, as physician practices recognize their stable, comprehensive model, leading to continued growth and opportunities. -
Shared Savings Variability
Q: Why did shared savings revenue come in lighter, and what's driving MSSP lives change?
A: Variability is due to normal quarter-to-quarter fluctuations across over 100+ value-based contracts, not specific to MSSP or any single contract. On an annual basis, shared savings revenue remains consistent, and guidance has been raised reflecting confidence in future performance. -
Commercial vs Government Lives Growth
Q: Why did commercial lives grow sequentially while government lives were flat?
A: Commercial lives typically grow with provider additions across markets. Government lives growth can vary due to timing and lagged attribution data. Overall, total attributed lives are ahead of plan. -
Stock-Based Compensation Increase
Q: What's driving the significant increase in stock-based compensation?
A: The increase is due to timing of annual equity grants. Last year, grants were issued in Q2; this year, they were issued in Q1, causing higher expenses earlier in the year. Expected annual stock compensation is $55 million to $60 million. -
Sales Process Evolution
Q: How has the sales process changed over the last two years?
A: The sales process remains largely the same, focusing on the comprehensive value proposition to physician practices, including all specialties, patients, and payers. The consistent model and proven results continue to drive provider additions. -
Ohio and North Carolina Update
Q: Are Ohio and North Carolina partnerships performing as expected?
A: Both markets are progressing according to plan. Partnerships with Novant and OhioHealth are strong and developing over the long term, with expectations to build large medical groups similar to other markets. -
Prior Period Claims in Q2
Q: Can you address the prior year claims impact in Q2?
A: Updated payer data showed additional attributed lives for 2023, leading to increased costs but also corresponding revenue, resulting in minimal impact on the bottom line. -
3Q vs 4Q Cadence
Q: Can you comment on 3Q versus 4Q expectations?
A: The company expects the same seasonal trends as in past years, with the second half stronger than the first. They anticipate consistent patterns in utilization and shared savings, with good visibility into results. -
Fee-For-Service Collections Flat
Q: Why has fee-for-service collections per provider been flat?
A: Variations are due to factors like new providers joining midyear, the mix of physicians versus advanced practice providers, and specialty mix. Once markets mature, trends stabilize, and management is not concerned.