Signify Health - Q1 2022

Transcript

Operator (participant)

Good morning or good afternoon, everyone. My name is Melissa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Signify Health Q1 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A 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, please press star followed by the number two. Thank you. At this time, I will hand the call over to Steven Senneff, Chief Financial Officer, for opening remarks.

Steven Senneff (President, CFO, and Administrative Officer)

Good morning, everyone, and welcome to Signify Health Q1 2022 Earnings Conference Call. As many of you know, Jennifer DiBerardino, our investor relations leader, recently retired from Signify Health. Jennifer was a valuable member of my team, and we'd like to thank her for her contributions and wish her a long and happy retirement. It is my pleasure this morning to introduce Jason Plagman, who has joined Signify as Vice President of investor relations. Jason has extensive experience in healthcare from both the sell side and investor relations perspective, and we are very fortunate and excited to have him on board. Now I'll turn the call over to Jason for introductory remarks.

Jason Plagman (VP of Investor Relations)

Thank you, Steve. I'm very happy to be on our team, and I look forward to engaging with our shareholders and the investment community on Signify Health. This morning's call is being webcast live, and a recording will be available on the Events page of our investor website at signifyhealth.com through July 5, 2022. Throughout the call this morning, we will be referencing the financial tables that appeared in our press release dated May 4, 2022. We will also be referencing the Q1 earnings call summary slide presentation we have posted to the Events page of the investor relations website. On today's call, we will discuss Signify Health's business outlook, and we will make certain forward-looking statements within the meaning of the federal securities laws.

Please note the cautionary language about our forward-looking statements as presented in our earnings press release and in our quarterly report on Form 10-Q, which will be filed later today. That same cautionary language applies to this conference call. We will also discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin. Reconciliations to the relevant GAAP numbers for these non-GAAP measures are included in the earnings release filed on Form 8-K yesterday and also in our Form 10-Q, which will be filed later today. Joining me on the call today are Kyle Armbrester, Chief Executive Officer, and Steven Senneff, President, Chief Financial and Administrative Officer.

Kyle will provide a business overview followed by a financial review by Steve. We will have an operator-facilitated Q&A session after our prepared remarks. Now I will turn the call over to Kyle.

Kyle Armbrester (CEO)

Thank you, Jason. We're glad to have you on the team. Good morning, everyone, and thank you for joining us. Yesterday evening, we announced a strong start to 2022. Team Signify has continued to drive significantly better outcomes for individuals across the continuum of care while supporting our customers' success in alternative payment models. Our Q1 performance reflects the hard work and strategic investments we have made to generate results. Q1 financial results were driven by significant positive momentum in our Home and Community Services segment and continued solid execution against our corporate strategy. We grew our overall top line in the quarter by 20% to $216.5 million and delivered $45 million of adjusted EBITDA, an increase of 31% from a year ago, with a corresponding adjusted EBITDA margin of 20.8%.

We entered 2022 with two established and highly complementary segments, home and community services or HCS, and episode of care services or ECS, each an industry leader for their respective areas. With the addition of Caravan Health, a leader in accountable care organization or ACOs into our ECS segment, we will be able to leverage both our HCS and ECS assets to provide total cost of care management services for our customer base and drive meaningful shared savings in the ACO Medicare Shared Savings Program or MSSP. In-home evaluations will be an important tool for condition management and cost containment for our ACO clients. Our established post-acute management and transition to home services within our episodes business will also drive better outcomes for beneficiaries. Caravan customers have already shown early interest and excitement for these expanded services.

The ongoing strength in HCS is driven by the growing momentum of clients expanding in-home evaluation delivered nationwide through our network of over 10,000 clinicians. While clients have meaningfully increased their volume commitments with us, there's ample white space for us to continue to grow with them. In addition to the natural growth rate of Medicare Advantage member enrollment, we have the opportunity to continue our expansion into other lines of business with our health plan clients and provide more IHEs to managed Medicaid and commercial plans. Managed Medicaid and commercial plans are off to a great start and are a growing component of our IHE volume.

We expect this market and our share of it to grow over time, especially as clients continue to focus on leveraging IHE as a mechanism for engaging members, identifying barriers to their health, addressing health disparities, and directing them to the right care. Member conversion rate improvement is important to drive future growth for both Medicare Advantage and Managed Medicaid. We continue to invest in advanced analytics and member engagement strategies to improve our conversion rates over time. We want to ensure we can provide these comprehensive free-to-member clinical evaluations to as many eligible individuals as possible. Expanding our diagnostic testing capabilities provides another meaningful avenue for growth among our client base, as demonstrated by early pilot success for new diagnostic devices.

Diagnostic testing provides additional data to help health plans better identify and manage their members' chronic conditions early before they result in an acute event, and to engage members with the appropriate primary or specialty physician. Turning to our ECS business. ECS revenue increased 7% in the Q1 from a year ago, reflecting growth in program size and one month of Caravan revenue. In April, we announced a new episode of care program client, ConnectiCare, a leading health plan in Connecticut. This new program will be organized around financing a member's entire health episode for both procedures such as knee surgery and chronic condition or conditions such as asthma and maternity. The addition of ConnectiCare demonstrates our commercial stacking strategy to build multi-payer relationships with and drive meaningful volume to high-quality, low-cost providers.

In Connecticut, our relationship with ConnectiCare will leverage and build on our extensive episode-based provider network already in place through our work with the state of Connecticut as a major self-insured employer. We deliver savings every day to our partners in the BPCI-A program despite the ongoing headwinds from COVID-19. We are proud of the work our team does to improve outcomes and reduce costs by influencing the next site of care and length of stay for individuals in episodes, and then managing their transitions back home to prevent readmission. We're excited to be largely back out in the field with our clients after managing much of this work virtually throughout the pandemic.

We continue to engage with CMS on an episode strategy for the next iteration of the bundled payments program, which could include an integrated total cost of care model in line with our strategy of combining Caravan Health with our BPCI-A footprint. Both existing BPCI-A and ACO clients are very excited about this combination and creating an integrated model. Our integration of Caravan following the close of our acquisition on March first is proceeding well, and we are thrilled to have the Caravan team on board. We recently held a two-day on-site meeting with the key internal stakeholders and established our integration management office, which is centered around two work streams, functional alignment and growth. The functional alignment work stream is focused on merging the work of certain functions that should come together, like accounting and finance.

Growth work streams are focused on areas where we will have new opportunities to grow as a combined organization by adding to our product portfolio and go-to-market activities. As I mentioned before, a notable growth synergy is our IHE offering, which we are adapting to conform to an annual wellness visit to complement and enhance the ability of our Caravan client providers to succeed in the ACO model by extending the provider's reach and expanding their capabilities. While the savings levers in our ECS business have been primarily related to next site of care following acute event and post-acute management, our key savings lever in the MSSP ACO program is identifying conditions early through an annual wellness visit.

Through our combined offering, we believe we will be able to readily engage with Medicare beneficiaries who historically have not visited their primary care physician, as well as conduct our comprehensive in-home evaluation as a part of an annual wellness visit for high-risk members to identify risks and gaps in care. From this work, we will be able to better drive patients to the next best action in their care journey and provide a more complete view of the patient to their PCP. I am very pleased with the positive reaction from our clients who are excited about the prospect of Signify Health providing a total cost of care model.

Since the close of the acquisition, the Caravan leadership team and I have been on the road meeting with customers about integrating Caravan's extensive primary care provider relationships with Signify's specialty care provider relationship and industry-leading in-home evaluation and episodes of care capabilities. The combination enhances the value proposition to providers as our services have a multi-payer applicability to a larger portion of the provider's panel. By multi-payer, we are referring to our deep relationships and existing contracts with private insurers and state and federal governments. We now have the capabilities in-house to create a total cost of care model to drive better patient outcomes and reduce costs in the system. In addition, the CMS announcement for the ACO REACH program creates another potential avenue of growth for our combined Signify Caravan business model.

We recently submitted our application to participate in the ACO REACH and will continue to assess the proposed program structure and how we can best leverage our combined capabilities to maximize the opportunity that launches in January 2023. As we think about our product roadmap, the core of our strategy is to build out capabilities to connect health plans and other risk-bearing entities with provider groups in an effort to accelerate transformation of U.S. healthcare system from fee-for-service to value-based care. We plan to contribute to genuine care redesign and be a partner to risk-bearing entities and provider groups to help bridge the gap that creates significant cost, waste, and poor outcomes within the healthcare system.

We want to be at the industry forefront as an intermediary, providing data and insights, activating the home, managing chronic conditions, and facilitating the launch of programs through a shared savings payment structure to make all parties accountable and work together to drive better outcomes for individuals throughout the country. We believe we can accomplish this over time due to our current capabilities and those we are developing. Data is the key to powering and creating value-based programs. We are able to capture hundreds of data points in each in-home evaluation that our clinician network performs. We have about 40 million members in our data chassis, and we expect to perform approximately 2.4 million evaluations in 2022.

This is a meaningful amount of data capture that informs our health plan clients not only on the clinical and social needs of their Medicare Advantage members, but also their managed Medicaid members. The data becomes even more valuable to our clients as we continue to build out more value-centric analytics integration with their systems. Our work capturing, enhancing, and driving results from our data and analytics capabilities is absolutely critical to our clients' success in their value-based payment program. The work we are doing will support CMS in their goals around health equity through showcasing and doing analytics on our unique data set that we are capturing across the continuum with the members and the patients that we are honored to serve. Our enhanced analytics also drives better care management and outcomes for the individuals supported by our clients.

We improve patient outcomes by sending clinicians into patients' homes to better assess their needs and provide decision support as we drive action and return folks to care. We reduce costs for insurers, employers, and health systems by deploying our data, analytics, software, and contracted networks of healthcare providers. As an organization, we are very excited about the opportunity in front of us to positively impact a fragmented healthcare system in partnership with risk-bearing entities and payers to provide patients with better outcomes for maintaining their health. Before I turn the call over to Steve, I want to make you aware that we recently published our inaugural Quality and Social Impact Report, an endeavor about which the board and the management team are very passionate. It establishes a framework for reporting on environmental, social, and corporate governance initiatives focused on driving value for shareholders and stakeholders across healthcare.

The report also includes key accomplishments from 2021 and establishes a baseline from which the company will measure progress in several areas of focus. Signify exists to give providers, payers, and the people they serve the information, tools, and support needed to achieve the best possible health outcomes, and to do so efficiently and cost effectively. The Quality and Social Impact Report is an important way for us to tangibly demonstrate how we live by our commitment in all that we do. We hope that you have a chance to read the report, which is available on our website, and we look forward to receiving your feedback. I will now let Steve walk you through the Q1 financial results.

Steven Senneff (President, CFO, and Administrative Officer)

Thank you, Kyle. Good morning, everyone. It is my pleasure to walk you through another quarter of positive improvement in our year-over-year financial results, reflecting our success in growing the business while delivering significant value to customers and individuals. I will be referring to the tables that appeared in the earnings press release issued yesterday, as well as the earnings presentation posted on the events page of our investor relations website. As you can see in table one, we had record total revenue of $216.5 million in the Q1, up 20% when compared to the same period last year. The increase was primarily driven by HCS growth of 23% to a record quarterly revenue of $186.9 million, reflecting strong IHE volume.

Total evaluation volume for the Q1 was approximately 564,000, including virtual evaluations, compared to 462,000 in the Q1 of 2021. The mix of in-home evaluations continued to trend upward, with approximately 14% of total evaluations being completed virtually. Given the continued and encouraging level of the client demand for IHEs, we are confident in our projections for IHE volume of approximately 2.4 million for the full year 2022. Our expanded agreement with Optum to extend their volume commitments through mid-2026 is a great example of strong customer demand.

As we shared with you last quarter, Optum committed to volume for an additional three and a half years in exchange for a floor agreement that guarantees a minimum dollar value of $118.5 million in relation to the ultimate settlement of the original years. We believe this floor will become irrelevant over time as our continued success is reflected in the stock price. As a reminder, GAAP requires us to record a charge against revenue based on the fair value of the floor agreement at inception and over the term of the contract. We have completed our analysis of the floor agreement impact on revenue for 2022, and including the original years, the charge to revenue will be a total reduction in HCS revenues of $26 million.

For the volume commitment extension period, 2023 through 2025, each year there will be a $20 million revenue reduction, and in the final half year of 2026, a $10 million revenue reduction. Still on table one, ECS revenue grew 7% to $29.6 million, reflecting growth in overall program size and one month of Caravan revenue. BPCI-A program Q1 revenue was within our expectations as we continue to see COVID exclusions and high inpatient rehabilitation facility utilization. Given the recently relaxed mask mandates and news coverage about the spread of the latest variant, we expect program size to continue to be impacted by COVID exclusions. CMS has not committed to reversing the COVID exclusions, but this remains something they continue to evaluate.

As a reminder, we receive program reconciliations from CMS in the second and Q4, which is when we typically perform a true-up based on the reconciliation. The next detailed BPCI-A readout will be when we receive the reconciliation for the sixth performance period, which is expected during the Q2. Moving to table four, total company adjusted EBITDA for the Q1 increased 31% to $45 million. Compared to $34.4 million for the Q1 of 2021, driven primarily by strong revenue growth in home and community services. In turn, we had an adjusted EBITDA margin of 20.8% in the quarter. In total, for the full year of 2022, we expect margin expansion of between 25-70 basis points.

Like everyone, we're experiencing impacts from increasing fuel prices and labor costs, but we've been able to offset inflationary trends with productivity improvements.

Back to Table 1, the net loss for the quarter of 2022 improved to $16.3 million when compared to a loss of $51.7 million in the Q1 of 2021. We had positive operating income of $10.5 million. The primary reason we reported a net loss was that we had $28.9 million of expense related to marking the warrants to market as we do each quarter. Last year, the impact of revaluing the warrants was $56.8 million of expense in the Q1 of 2021. Moving on, as you can see in Table two, our balance sheet is strong as we ended the quarter with $451.3 million of unrestricted cash, down from year-end due to the $190 million cash payment portion of the Caravan acquisition.

We ended the quarter with debt outstanding of $338 million, with an additional $173 million in capacity under our revolving credit facility, and once again, a negative net leverage position as our cash exceeded the debt levels. Given that we just provided 2022 full year guidance in March, we are maintaining those estimates and feel very good about achieving the results we've outlined for 2022, which are as follows, total revenue in the range of $948 million-$971 million, and total adjusted EBITDA in the range of $212 million-$222 million.

We still expect 2022 revenue phasing for the second half of the year to be about 52% of full year revenue guidance as we anticipate stronger ECS program size and IHC capacity to build into the back half of the year. I look forward to updating you on our financial results next quarter. Now I'd like to turn the call back to Kyle for closing remarks.

Kyle Armbrester (CEO)

Thanks, Steve. We are off to a great start in 2022. Team Signify is relentlessly focused on the incredible market opportunity we have in front of us to drive value-based care models forward while expanding services to better serve our customers and individuals. Adding Caravan provides us an important component, bringing all of our capabilities together to drive a total cost of care model. With Caravan, we now have a solution set that covers risk extensively and fully enables us to use our episodes, post-acute, and in-home capabilities to bridge the gap between providers and payers. It's a great platform for our clients and a unifying asset to further connect our HCS and ECS divisions.

Additionally, we've had great conversations with CMS about the integration of these businesses and believe we are well suited to help them achieve their goals of having everyone in Medicare in an accountable care organization by 2030. With Caravan, we now have the ability to bring our in-home services already scaled in Medicare Advantage to the Medicare fee-for-service population through the ACO book of business, which should drive significant value for all constituents, including shareholders. Now I will turn the call over to our operator to take your question. Operator?

Operator (participant)

Thank you. At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Steven Senneff (President, CFO, and Administrative Officer)

Harry's onto the queue.

Operator (participant)

Our first question today comes from Sandy Draper of Guggenheim. Sandy, over to you.

Sandy Draper (Senior Managing Director)

Thanks so much, and good morning, everyone. I guess the first question, either for Kyle or Steve, would just love some more commentary around how you view the size. I believe last quarter you guided the program size to around $5.1 billion-$5.6 billion. I'm trying to understand from your comments, is that still the reasonable range? Should we think about the lower end of that range? Just trying to understand sort of how that size is looking today versus when you got it a few months ago.

Steven Senneff (President, CFO, and Administrative Officer)

Hey, Sandy, it's Steve. Yeah, good question. We, I would say absolutely, we're still in that range. We're encouraged by the program size coming back from last year. Really, you know, the difference between whether we end up at the low end or the high end of that range is gonna depend on how many COVID exclusions we have going forward. Right now, we're still very comfortable with that range.

Sandy Draper (Senior Managing Director)

Okay, great. That's helpful. My follow-up, and then I'll jump back in the queue. Obviously, you've got Caravan will be a bigger contributor in the back half of the year. Just remind us in terms of the higher second half weighting, are there other impacts that we should make sure we're factoring in besides just the higher weight of Caravan revenue in the second half? I'm just thinking about whether it's either volume trends, pricing trends around an HCS or an ECS excluding Caravan. Thanks.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah, it's a little bit of all the above. It's, you're gonna have the ECS, which is, you know, with the higher program size versus last year, that we just talked about. You're also gonna have on the HCS side

You know, we just, as you heard, we had a record volume for quarter one. You know, we're trending towards a record volume in quarter two. You know, we had never done over 500,000 evals in a quarter. We crushed through that last quarter. We're trending towards 600,000 in going forward. The back half is all gonna be about driving that capacity. The demand is we've never seen higher demand ever for our IHE business. We're gonna see continued strong demand through that second half.

Sandy Draper (Senior Managing Director)

Great. Thanks much, and congrats, and I'll jump back in the queue.

Kyle Armbrester (CEO)

Thanks, Sandy.

Operator (participant)

Thank you, Sandy. Your next question comes from the line of Anne Samuel from JPMorgan. Anne, over to you.

Anne Samuel (Executive Director of U.S. Healthcare Technology and Distribution)

Hi. Thanks so much for taking the question. Maybe just a follow-up to Sandy's question. You know, you had some really nice outperformance in the Q1. But initially, you'd said, you know, Q1 would be a little bit lower. You affirmed the guide and the weighting for the year. Just wondering if there's anything we should be taking into account for the Q2, that might have been the reason for, you know, kind of holding onto the guide, or is that just, you know, some embedded conservatism there?

Kyle Armbrester (CEO)

You know, I would say that we had a little bit, maybe, the slight upside that I'd say is a little bit of a pull forward from Q2. Back half, as we just talked with Sandy, is looking really strong. You know, that's how I'm thinking about Q2. As far as a full year, feel really good about the numbers, and we're gonna get the recon in quarter two, which will give us more insight of where we're going. You know, right now, internally, all numbers are tracking to our expectations, but we're waiting to get that recon, hopefully, in the next few weeks.

Anne Samuel (Executive Director of U.S. Healthcare Technology and Distribution)

Makes sense. It's still early. You know, you said that the Caravan integration is progressing well. I was hoping maybe you could share some learnings that you've had so far from that.

Kyle Armbrester (CEO)

Yeah, absolutely, Anne. I spent a lot of time out in the customer base with the Caravan leadership team, as I alluded to, in the prepared remarks, and it's been fantastic. I mean, when you go out to these clients, they're facing staffing issues. They're facing an inability to get into the post-acute. They don't have the ability to go out and get into folks' homes to find conditions and to capture those conditions or to manage them appropriately after they've been identified.

What we're bringing to that client base really is all of these services that we've built out inside our Home and Community Services division with all of that network density going into homes, and then all of the specialty and post-acute work via episodes and all the post-acute workflows we have as a part of the episode business. All of those things, when combined, have a tremendous ability to drive better patient outcomes and to remove costs and drive better shared savings. It's been a really great kickoff on just those synergy cases that we've talked about that we're pursuing as we bring all these businesses together, number one. Number two, there's their model and how they collect revenue from the or make revenue from the clients is similar to how our episodes program works.

They have a shared savings construct, and it's easy for us internally to merge together a lot of the financials, you know, in Steve's world, a lot of the system and analytic work that we're doing. We picked up, frankly, just a bunch of engineering and product and analytic talent, you know, as a part of this acquisition. The Caravan Coach that I mentioned last quarter, when we mentioned the acquisition being closed, you know, is a really big software asset for us that sits on top of physician workflow and helps identify, you know, key needs that they need to work on.

We see a bunch of synergies with that as we think about taking more risk to our health plan clients, and as we think about tying together post-acute specialty and some of the in-home workflows as well. It's been a really good kind of centralizing and unifying asset to the business, bringing together so many of the capabilities that we have. Yeah, integration's plugging along really well and, you know, we've got the same team, you know, here that's done a lot of M&A and a lot of integration together. We always, you know, start with the people first and the culture first and don't just manage it off spreadsheets. I've been very happy and thrilled, frankly, with the progress that we've had to date.

Anne Samuel (Executive Director of U.S. Healthcare Technology and Distribution)

That's terrific. Glad to hear it. Thanks, guys.

Kyle Armbrester (CEO)

Yep. Thanks, Anne.

Operator (participant)

Thank you, Anne. Your next question comes from the line of Cindy Motz of Goldman Sachs. Cindy, your line is now open.

Cindy Motz (VP Equity Research)

Thanks, and thanks for taking my question. Congrats on a very strong quarter, and welcome, Jason. My question's on the HCS business. Obviously, that's very, very strong, and it's not just in terms of the record visits, right? Just looking for a little clarification. It looks, when I look at the numbers, that your revenue per visit is also rising, at least according to what we had, you know, both sequentially and year-over-year. Just looking for a little more color on that. Just in terms, Steve, of the thing you said about Optum, you know, and then the earnout that you always report and your guidance is ex earnout effect on revenue, correct? I might have one more follow-up. Thanks.

Kyle Armbrester (CEO)

Yeah. A couple things there, Cindy. Let's start with the first one on the revenue per HCS. You know, that we continue to see really positive trends there. When you look at it and holistically, it looks like it's you know, slight increase, relatively flat, though. As I've said previously, just wanna make sure to remind everyone, you know, there is some client mix impact, where some of our largest clients are outpacing the growth rate of others with different price points. But when we look at our individual values and our attachment rates of our diagnostics and preventative devices, we feel really good about where we're going and where we can go with that number in you know, 2023 and beyond.

Steven Senneff (President, CFO, and Administrative Officer)

As far as the year impact, that's included in all our numbers.

Cindy Motz (VP Equity Research)

Right.

Steven Senneff (President, CFO, and Administrative Officer)

All our guidance and everything that we show, it's included in there. It's our GAAP revenue. You know, there's no surprises there. I'm just trying to make sure everyone has those numbers, so you can put them into your models. You know, it's been averaging about $20 million a year. This year it's gonna be $26 million. The next, you know, 2023, it'll drop down to $20 million again. That's all in our numbers. It's all our guidance.

Cindy Motz (VP Equity Research)

Great. Then also too, just even on the cost control, you know, with the HCS division, you know, it was like probably $290. I mean, it was very significantly higher than we were expecting. I guess you're leaving guidance the same for the year just because the ECS, which is obviously much smaller but still has a loss. I guess, you know, what we can expect is a similar cadence to what you were saying, you know, Q1 and then maybe you'll look to where it is if those trends are continuing. 'Cause I would think with COVID abating some, and if the margins can stay up or they're ahead of our expectations in HCS, then there's a possibility at the back end. It feels like you might go ahead and tweak that later on.

Just any color there would be great. Thanks.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah. Look, I think one of the things that, you know, us and every company out there is worried about is inflation and the impact. We're really proud of the productivity initiatives that we've put in place to really offset a lot of that. That's why you're seeing, you know, despite some of those inflationary pressures that we have, that we're still driving, you know, really nice margins. Just points at you know, if we look for the upside case of where we could even outperform that, it's exactly what, you know, the items that you just mentioned.

Cindy Motz (VP Equity Research)

Great. Thanks again. Good quarter.

Steven Senneff (President, CFO, and Administrative Officer)

Thanks, Cindy.

Operator (participant)

Thank you, Cindy. Your next question today comes from Kevin Caliendo of UBS. Kevin, your line is now open.

James Carrig (Analyst)

Hi, this is actually James Carrig on for Kevin. You mentioned in-home evals were 14% of total mix in the quarter. Just maybe where do you see that mix between in-home and telehealth trending for the remainder of the year?

Steven Senneff (President, CFO, and Administrative Officer)

Yeah, I would expect that it's, you know, somewhere in that range. You know, that we've kind of come down from our peaks of, you know, less than 40% a couple of years ago. Like, I feel that, you know, that 14% of where we were this quarter is kind of in line with where we would expect it would be.

James Carrig (Analyst)

The 14 was virtual, just to be clear, not the in-home percentage.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah.

James Carrig (Analyst)

Just to reverse there.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah, sorry. To make sure that's clear. Yeah, 14% was virtual. You know, as we've said on previous earnings calls, our clients are really pushing us to do as much in-home as possible. Over time, I would expect that it will go down as long as there's still, you know, some variance out there. I think it's fine in the model to keep it around that rate.

James Carrig (Analyst)

Great. Thanks. Maybe just one quick follow-up and more big picture question around ECS. How should we think about the pathway to profitability maybe in 2023 and beyond? Thanks.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah, a couple of things that are gonna be helpful for us in 2023. One is we are assuming that we'll get back to break even or profitable in 2023 in the ECS segment, standalone. The drivers of that are really gonna be the program size coming back to its full run rate, which, you know, we've called out is around $6 billion. We feel good that that will happen in 2023. We also feel that some of the COVID exclusions that CMS has in place today will go away, which is also going to be beneficial for us in driving that savings rate back up as well. Those are gonna be a couple of key components.

You know, we continue to make traction in our non-BPCI business as far as our commercial side of the house, and so we feel good about, you know, getting additional revenue growth there. Last but not least is Caravan, you know, acquisition that we feel is gonna be a nice driver of additional revenue and EBITDA for us in 2023 and beyond.

Operator (participant)

James, your line is still open.

James Carrig (Analyst)

Oh, I'm all set. Thank you.

Operator (participant)

Thank you. We'll take our next question from Gary Taylor of Cowen. Gary, please go ahead.

Gary Taylor (Managing Director - Equity Research)

Hi. Good morning. Just had a few questions. What are your Caravan revenue EBITDA expectations for 2022, for this year still intact? Is there any change to what you had given us previously on that?

Steven Senneff (President, CFO, and Administrative Officer)

Yeah. No changes. We still feel good about, you know, Caravan and where they're at, and we're in a big sales process for 2023 right now, and so big focus on that. But expectations are they'll be able to deliver what we've talked about in previous calls for 2022.

Gary Taylor (Managing Director - Equity Research)

Got you. In terms of, you had mentioned a little bit of 1Q pull-through from 2Q, what do you think that's related to? I mean, how did Omicron impact the quarter? I would imagine that sort of, you know, weighed to some degree on some of the in-home or willingness to do in-home. I guess I would have thought maybe the opposite of that, just wanted to understand kind of what that pull-through might have been.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah. It wasn't a significant impact on our HCS side of the house. It was really on the ECS where it continued to, you know, reduce program size through the elimination of episodes that had a diagnosis of COVID. On the HCS side, it wasn't a lot of impact.

Gary Taylor (Managing Director - Equity Research)

Last one. I haven't really heard you guys talk about fuel before. Obviously, you know, fuel prices are up, so it makes some sense. Is there any way you could give us, you know, like, a quarterly fuel reimbursement, or some way to sort of size that just so we can keep an eye on it if it were to become material?

Steven Senneff (President, CFO, and Administrative Officer)

It's not material, Gary. It's pretty small in the grand scheme of things. We just called that out as, like, one of the things that we look at for inflationary that's a little bit higher. It's certainly, you know, obviously, we do have folks that are out in the field, but it is not material. Even if gas prices doubled, like, it's not gonna. We're not gonna change guidance for it.

Gary Taylor (Managing Director - Equity Research)

Got it. Okay, thank you.

Operator (participant)

Thank you, Gary. Your next question today comes from Jessica Tassan of Piper Sandler. Jessica, please go ahead.

Jessica Tassan (Senior Research Analyst)

Hi. Thank you so much for taking the question. Just interested to know on the quarterly cadence of IHE volumes, is there anything different this year relative to last? I think you guys mentioned capacity. Just maybe you could elaborate on that a little bit.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah. I think it falls a little bit more. I'm not sure I know what typical is anymore, but as far as a more typical year, the one thing that's probably gonna make it a little bit off of a standard year is kind of what I was alluding to earlier, is the fact that we've just got so much volume to build and so much demand that in that we expect a pretty significant back half of the year. You know we'll probably still have our drop-off in Q4 that we have every year just as we wind that down, but it might not be quite as significant as in the past just because there's so much demand that we're keeping up with.

Jessica Tassan (Senior Research Analyst)

Got it. Is the 10,000 or are the 10,000 people in the field today sort of enough to support that demand, or do you guys anticipate making some additional hires or need to do some additional hiring over the course of the year in order to support that?

Kyle Armbrester (CEO)

Yeah. It's I guess the answer is both. We feel great about the capacity to hit our numbers this year, but we always are making hiring and moving, you know, capacity around and credentialing new providers in new markets. So that never stops. And frankly, towards the end of the year, we try to load a lot of capacity going into the next year, right? Because as we've talked about, we get a lot of our, you know, member files and other things in Q4. We start capacity planning, hiring, and laying out our ground game across the nation, you know, in every county of the U.S. on how we're gonna deliver that capacity.

I will mention, though, you know, something I alluded to earlier, there's a new wrinkle to all of this because we are now going to be doing in-homes inside the fee-for-service book, right? This is a big TAM expansion for us. We are moving the in-home evaluations into the fee-for-service ACO book, you know, that is Caravan, and there's a tremendous amount of value to be had there. Our value prop now when we go into a market is we're gonna be doing in-homes for all populations inside Medicare, right? Regardless if they're in fee-for-service or Medicare Advantage.

This is a really big, exciting expansion that we're excited about, and something that we're gonna be, you know, investing in more capacity, upgrading our technology, making sure that we're connecting these folks back in the healthcare system better than ever, right? Because now that we're in the total cost contract with these provider groups, you know, there's a ton of incentive to go out and do condition identification and to make sure that they're being managed proactively with those provider partners that we have those shared savings contracts with. It's a pretty large TAM expansion for us and one of the, you know, reasons we're so excited about this Caravan integration unifying so many of the capability sets that we have as a part of our business.

Jessica Tassan (Senior Research Analyst)

That's helpful. My last one would just be, I guess, first off, are you going to be reporting the Caravan IHEs in the overall IHE number? Can you just remind us of Caravan's historical performance in MSSP, both in terms of dollars and percent savings? Thanks.

Kyle Armbrester (CEO)

Yeah. We won't be breaking them out separate because they're gonna be into the shared savings fee structure, right? Like, we're gonna be doing them as a part of the ACO service model that sits in the ECS division. So we won't be breaking them out separately. Steve, do you wanna comment on historical savings rates?

Steven Senneff (President, CFO, and Administrative Officer)

Yeah. I mean, historically, it's been, you know, around in the 3% range. One of the things that we're really optimistic about is when we start adding all these additional services and assets around this business, that we can drive significantly higher savings rate for the business going forward.

Jessica Tassan (Senior Research Analyst)

Got it. Thank you.

Kyle Armbrester (CEO)

Yep. Thank you.

Operator (participant)

Thank you, Jessica. Our next question comes from Matt Larew of William Blair. Matt, your line is open.

Matt Larew (Research Analyst, Healthcare)

Hey, good morning. You in response to Gary's question, you sort of reiterated the outlook for Caravan in 2022. You previously talked about EBITDA doubling in 2023. I guess we just wanted to gauge your confidence in that and maybe how much of that is from success in the selling season as Steve alluded to versus improvements in the savings rate, which you just referenced.

Steven Senneff (President, CFO, and Administrative Officer)

Yeah. We're still confident in everything. In fact, as what Kyle has been talking about, we're even more confident on our ability to be able to do that. And some of it will be through some of the new sales. ButWell, a lot of it's gonna be just improving the savings rate and our shared savings ability with the program going forward in 2023. Yeah, very confident in that.

Kyle Armbrester (CEO)

When I've gone out to the clients too, just to reiterate that, I mean, I always start with a question like, "What are some of your biggest gaps, some of your biggest needs, you know, in this community?" They're like, "Look, we have no access into the home, and the post-acute is a black hole for us." If you look at two core competencies of Signify, we are one of the best in the nation at getting doctors and nurses into homes to perform a battery of complex tasks, and we are managing more post-acute risk than anybody, right? It's a really good capability set for us to bring to these organizations where, you know, they know that they have gaps and they're looking for a partner to help.

Matt Larew (Research Analyst, Healthcare)

That's great. Kyle, I'm just kind of curious, what are your key technology goals for this year? Obviously, you have Caravan Coach under the hood, and just curious how much of an opportunity there is to create some interoperability with your platform or if there are learnings from, you know, your platform versus Caravan that you can share or improve upon.

Kyle Armbrester (CEO)

Yeah. Absolutely. First and foremost is technology hiring, right? Every, you know, company in the country that I'm aware of, especially in the healthcare tech space, you know, is making sure that they're staying on top of the hiring curve. We've bumped up incentives, you know, compensation, benefits, flexible working environments, a whole battery of things there to make sure that we're getting the best and brightest and feel great. We've got a really strong leader, Mike, who's running our recruiting efforts there, and he's continued to just bring in fantastic talent. We feel like that has been managed extremely well, and is not a key risk for the business and something I'm really proud of. What those teams are doing is really twofold.

One, to your point, is data level integration, making sure that we're bringing in all of the existing, you know, data feeds that we get from our health plan clients and from our health system clients, from the federal government and from employers, that we're massaging that data, creating a longitudinal view of these individuals. Number two, going out and filling in the gaps, as I just mentioned, where folks aren't collecting data. They're not getting data inside the home. They're not getting data inside the post-acute. They're not connecting well with specialists. Signify really exists to round out all of those gaps where the traditional system has not been great at getting data and access and activating individuals on their care journey. So that kind of data aggregation and insight piece would be number one.

Number two, we are continuing to do workflow expansion inside of our existing products. Connecting to new devices, expanding new return to care options to make sure that if we go in and diagnose someone with dementia, that we're able to get them to see a behavioral specialist with one of our partners, you know, in short order. A lot of that integration work and extending workflows to take better care of these individuals is where our product teams are spending a lot of time.

Matt Larew (Research Analyst, Healthcare)

Okay. Thanks, Kyle. That's helpful. Sorry, if I could just sneak one more in. Steve's referenced hiring on the technology side. On the HCS side, you know, over the last year or so, you have not had any issues given your workforce really is differentiated and specialized. Just curious, given the sort of record demand you've had, what sort of hiring do you have in place for 2022, on the assessment side, and if you've noticed having to, you know, pay more or longer fill times in terms of the open roles there?

Kyle Armbrester (CEO)

We've actually just taking it from the top. I mean, we've had more client demand, to Steve's point, than ever because of our great ability to manage and grow this capacity. When they're running into issues across the gamut from doing our traditional evaluation work to the work I just mentioned in the ACOs, like we are seen as a key, you know, technology and service enabler that can fill that gap to really bring folks into the home, into facilities, into post-acute areas, again, where folks can't get to. That is our big differentiator. We have continued to ramp and scale that nicely. I mean, you guys saw, you know, how margin performs. We've done that and have managed through that really well with the team.

As Steve has mentioned and I've mentioned on numerous calls, we always have special incentives in certain markets. We move volume and capacity around. Part of our model that makes it so beautiful is that it's flexible, right? People are not static in a single market. If there's a surge in demand in a particular county, even a rural county, like, we can move folks there and swarm that demand to make sure that we're, you know, making our clients and those members' lives that we touch or those patients' lives that we touch, you know, successful and improve their health outlook. We've been able to grow substantially.

We've kept all kind of incentives and any bonuses pay things in line with all of our expectations and feel very, very great about our ability to continue to recruit and grow this business to meet all of our client demand.

Matt Larew (Research Analyst, Healthcare)

Okay. Thanks a lot, Kyle.

Kyle Armbrester (CEO)

Yep.

Operator (participant)

Thank you, Matt. As a reminder, if you would like to ask a question, please press star then the number one on your telephone keypads. Your next question comes from Vikram Kesavabhotla of Baird. Vikram, over to you.

Vikram Kesavabhotla (Senior Research Analyst)

Hi. Thanks for taking the question. I just wanted to follow up on your prior comments on the labor side. I guess, are you seeing any incremental wage pressure so far this year in your provider network relative to what you expected, and what are you assuming in the guidance for how the labor environment's gonna trend throughout the balance of this year? Then as a follow-up to that, you know, from a higher level, when you go through these periods of, you know, perhaps higher inflation on some of your cost inputs, whether it's labor or fuel as you talked about, are those things you're typically able to pass through to your customers over time on the revenue side, or are those things that you typically have to manage through just through efficiencies in the business? Thanks.

Kyle Armbrester (CEO)

Hey, Victor. I'll take that one. You know, back to my inflationary comment, everything's within our expectations and as you saw in, you know, Q1, we're managing with a nice margin improvement. As Kyle said, we will always, you know, figure out to meet the demand if there's special incentives that we need to do for a particular market to drive that, which, you know, would impact our gross margins. The beauty of what we've been doing is we've, you know, we saw this coming. We do this every year. We've got productivity initiatives that are always trying to drive the efficiencies, and you're seeing that in the numbers that we're covering off on all the inflationary pressures that we have. We do feel good about that.

You know, as far as, you know, some of passing it on to clients, you know, during COVID, there were some things we had to do with PPE and so forth that we're able to pass through and our clients are very open to that. I mean, at the end of the day, they really want us to drive, you know, the volume for them. That's not out of the question that that's always an avenue we can explore. At this point for this year, we haven't gone down that road in a significant way, and we've been covering most of it through our productivity initiatives.

Vikram Kesavabhotla (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our last question today is a follow-up question from the line of Cindy Motz of Goldman Sachs. Cindy, back to you.

Cindy Motz (VP Equity Research)

Oh, hi. Thanks again. Yeah, I just wanted to follow up. You had mentioned something, and I've been hearing more about like clinical trials, and you were talking about the diagnostic testing, you know, that market. I guess what you're talking about doing there, it makes sense because the, you know, you're already gonna leverage the in-home part of the business with ECS and everything else, so you're already there in the home. So I'm guessing that, you know, you have the data, you can identify people, you can look at that. Like, obviously you don't have anything in your numbers, but when would we maybe start to see that kind of thing? Like, when would that pick up? And just, Kyle, you had mentioned something then too about, you know, the overall TAM growing. Is that, is that part of that?

Are you talking about growing the TAM? 'Cause I think I had seen a slide a while back about maybe, you know, $400 billion or something. So just curious about how, you know, the diagnostic testing, clinical trial opportunity, like when we might see that and then, you know, how that might impact TAM. Thanks a lot.

Kyle Armbrester (CEO)

Yeah. Great question, Cindy. I'll take the TAM question first. Without a doubt, this is a TAM expansion as we're moving from just Medicare Advantage with the in-home visits to the Medicare fee-for-service book too. Now we are doing in-homes across the entire population right now. On the fee-for-service side, they need to be in one of the ACOs obviously, but there's a ton of folks, you know, millions of folks inside ACOs across the country. This really gives us the ability to go in and partner with a health system or partner with a plan and say anyone that's over, you know, 65, we wanna do these comprehensive visits on. That's. We're really excited about that, number one.

Number two, the diagnostic testing, that revenue and EBITDA flows into our HCS business today, and it's a very material part of that business. It's a fast-growing part of that business. You know, when I started four years ago, we were effectively doing zero there. Today, we are doing a tremendous amount of volume there for our clients and driving a ton of value. The nature of the majority of that today is focused on going in and identifying chronic conditions that aren't being managed appropriately, getting them on care plans, getting them back to a specialist, closing gaps in care, helping with Stars and HEDIS measures. So a whole battery of things that really matter for the health plans and the members that they, you know, are honored to serve.

All that being said, if you take a step back and look, Signify has the most comprehensive clinical data set anywhere. 'Cause we're getting all of the traditional data, as I mentioned, from the health systems, the health plans, the employers, but then we're going to these areas of healthcare where there's. They've been called, as I mentioned on the call today, black holes. No one has great data on the home. What's the social condition of the individual? What are they actually doing when they take meds? You know, do they have a, like extreme fall risk that hasn't been documented? How are they, you know, doing with their smoking cessation program when we can see that they're, you know, obviously still smoking when we go into the home?

In the post-acute world, you know, Seema Verma when she was running CMS, you know, mentioned it's an area where Meaningful Use never got to, right? Interoperability standards and the ability to have standardized systems and to have great visibility into the post-acute is not something that many health systems, even those that own post-acute facilities enjoy. Then finally, that handoff and many of the new value-based care entrants in the market have talked about how difficult it's been for them to connect with specialists. That's something that Signify excels at as well.

Bringing all of those things together, all of that rich data without a doubt has not only extreme benefit for our existing clients and the risk models that we underwrite, but we believe will continue to have a big play in the future with life sciences, real-world evidence and clinical trial delivery across these various populations, both on the identification side, we can find that needle in the haystack, but we also can bring healthcare to folks and not make them come into a facility to help execute and keep a trial on the right track.

We've, you know, frankly been continuing to focus on the two divisions and the big growth that we have, but it is without a doubt something we're working on, and it's something that we're excited about in the future to continue to expand on. We have, you know, plenty of conversations and work going on in that space today.

Cindy Motz (VP Equity Research)

Okay, great. Thank you.

Kyle Armbrester (CEO)

Yep. Thanks, Cindy.

Operator (participant)

There are no further questions at this time. Mr. Kyle Armbrester, I turn the call back over to you.

Kyle Armbrester (CEO)

Great. Thank you, everybody, and thank you to our customers, our employees, and all of our shareholders for supporting us through another great quarter. Thank you all for your interest in Signify Health and for joining the call today. If you have any additional questions, please reach out to Jason. Thank you, everybody.

Operator (participant)

This concludes today's conference call. You may now disconnect.