Bright Health Group Inc. reported its third quarter 2023 earnings, showing considerable progress across key initiatives and consecutive quarters of profitability in its consumer care business, New Health. The company also reported robust performance in its care delivery and care solutions segments, with the latter saving a total of $30.3 million. Despite winding down its ACA insurance business, Bright Health stated it remains confident about its future in the value-based care industry.
Key takeaways from the call:
- Bright Health's consumer care business, New Health, reported a second consecutive quarter of adjusted EBITDA profitability.
- The care delivery segment reported positive operating income, with strong performance in the ACA marketplace and Medicare Advantage business.
- The care solutions segment, particularly the ACO Reach business, reported combined gross savings of $30.3 million.
- Bright Health expects to close the sale of its California Medicare Advantage business in Q1 2024, which is anticipated to bolster its balance sheet.
- The company's year-to-date care solutions operating income is roughly breakeven, with enterprise adjusted EBITDA of $1.2 million in Q3 and $1.9 million year-to-date.
- Bright Health has $735 million in total cash investments and $113.6 million in non-regulated cash and short-term investments.
- The company expects to achieve enterprise adjusted EBITDA profitability for the year, with a revenue outlook for 2023 between $1.14 billion and $1.19 billion.
Bright Health Group (NYSE:BHG) has taken steps to reduce corporate operating expenses in Q4 and expects to support enterprise adjusted EBITDA in 2024. The company has made significant progress in winding down its ACA insurance business and has paid a significant portion of its risk adjustment obligations.
The company's full-year revenue outlook for care delivery is between $250 million and $295 million, and for care solutions, it is between $890 million and $910 million. Bright Health expects to serve 335,000 to 355,000 value-based consumers by year-end, focusing on profitable growth by adding consumers across payer categories and taking on greater responsibility for the total cost of care in payer contracts.
Despite the wind-down of the ACA insurance business and the sale of the Medicare Advantage business, Bright Health remains focused on long-term profitable growth in their consumer care business. The company serves consumers across Medicare Advantage, ACA marketplace, Medicaid, and federally qualified health centers and aims to add consumers across payer categories and take responsibility for the total cost of care in payer contracts.
The company did not hold a Q&A session due to the pending regulatory approval for the sale of its California Medicare Advantage business.
InvestingPro Insights
In addition to the details revealed in the earnings call, InvestingPro data and tips provide further insights into Bright Health Group's financial health and performance. According to real-time data from InvestingPro, Bright Health Group has a market cap of $60.51M USD, showing a significant revenue growth of 1945.27% over the last twelve months as of Q2 2023. Despite this increase, the company's gross profit margin remains low at 10.42%.
InvestingPro Tips highlight that analysts do not anticipate the company will be profitable this year, and the valuation implies a poor free cash flow yield. However, it's worth noting that the company's stock has seen a strong return over the last month.
These insights, among many others, are available through InvestingPro's comprehensive financial analysis platform, which offers numerous additional tips and metrics for investors navigating the financial markets.
Full transcript - BHG Q3 2023:
Operator: Hello, all, and welcome to Bright Health Group's third quarter 2023 earnings call. My name is Lydia, and I will be your operator today. It's my pleasure to now hand you over to your host, Stephen Hagan, Investor Relations Director to begin. Please go ahead when you're ready.
Stephen Hagan: Good morning and welcome to Bright Health Group's third quarter 2023 earnings conference call. As a reminder, this call is being recorded. Leading the call today are Bright Health Group's President and CEO, Mike Mikan; and CFO, Jay Matushak. Before we begin, I want to remind you that this call may contain forward-looking statements under US federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the risk factors in our current and periodic reports we file with the SEC. Except as required by law, we undertake no obligation to revise or update any forward-looking statements or information. This call will also reference non-GAAP amounts and measures. A reconciliation of the non-GAAP to GAAP measures is available in the company's third quarter press release filed on the company's Investor Relations page at investors.brighthealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated November 7, 2023, which may be accessed from the Investor Relations page of the company's website. While we continue to work through the necessary regulatory approvals and other closing conditions for the sale of our California Medicare Advantage business, we are not going to be conducting a Q&A session on this call. With that, I will now turn the conference over to Bright Health Group's Chief Executive Officer, Mike Mikan.
Mike Mikan: Thank you, Stephen, and good morning, everyone. In the third quarter, we continued to make significant progress across our key initiatives. Importantly, the consumer care business are continuing operations performed well in the third quarter with our second consecutive quarter of adjusted EBITDA profitability. We have focused the company on our value driven consumer care business, new health, where we are serving consumers through a differentiated integrated care model. We are aligned with our payer and provider partners clinically and financially to improve the quality and cost of care in both our care delivery and care solutions segments. We believe we are well positioned for the future of health care as the industry continues to shift to value-based care. On the call today, I'll start with a discussion of our care delivery segment, provide an update on our care solutions segment including our ACO reach business and go over our progress on our discontinued operations. Then I'll turn it over to Jay to provide additional details on our financial performance. Our care delivery business had a solid quarter. Excluding the impact of a goodwill impairment recognized in the quarter, care delivery produced another quarter of positive operating income and has shown strong year-to-date results. Across the ACA marketplace consumer served, our medical cost management and member engagement initiatives have been performing well. And in the third quarter, our performance metrics were strong, driving the care delivery upside in the quarter. The strong performance in Q3 gives us confidence in the potential for further upside in our care partner relationship. We have taken a conservative amount of risk in these contracts as we get to know the patient populations and care provider networks at our payer partners, but it is important to us that we have an aligned interest with our payer partners and that we are taking total cost of care risk. By successfully delivering on our aligned and integrated consumer care delivery model, we are lowering the cost of care for our payer partners and we are beginning to recognize the shared upside in these savings. Importantly, we are also seeing high levels of consumer satisfaction in our care delivery business as shown through our high NPS scores and Google (NASDAQ:GOOGL) ratings. Our care delivery business serving Medicare Advantage consumers also performed well in the third quarter. Medical costs on our fully capitated Medicare Advantage consumers were consistent with seasonal trends in the quarter and contributed to care deliveries gross profit performance in Q3. We believe our performance in our Medicare Advantage risk building relationships when measured by medical cost ratio, inpatient admissions and NPS and stars ratings is among the best in the industry. Turning to our care solutions segment and in particular, the performance in our reach ACOs. CMS recently released the final results for the 2022 ACO Reach program that showed solid performance for the two ACOs we operated in 2022. Our ACOs had a combined gross savings of $30.3 million, a savings rate of 4.4% compared to the benchmarks, which was more than 75 basis points better than the program average among all reached ACOs. Please note that this gross margin is before the mandatory CMS savings rate deduction of 2% and any risk-sharing arrangements with our downstream provider partners. Our new health pineapple ACO was one of the top performing ACOs in 2022 with a gross savings rate of 11%. Our Physicians Plus ACO also produced gross savings, but not sufficient to cover the 2% CMS mandatory savings requirements. The performance of the Physicians Plus ACO was weighed down by the deficit incurred by one of our provider partners, Babylon Medical Group. Jay will provide additional details on the impact of the Babylon relationship and their bankruptcy filing. Apart from the impact of the Babylon bankruptcy, our 2023 REACH ACOs are performing in line with our expectations. In 2024, Babylon will no longer participate in our ACO Reach program. Our care solutions team has secured additional provider partners to add to our Reach ACOs and is projecting some organic growth from our existing partners for 2024. Although we expect some pressure on top line growth related to the ACO Reach business, we expect overall ACO Reach margins to improve as the terminated providers are projected to run deficits in 2023. The team continues to engage a number of new provider groups on the physician enablement part of the business across payer categories. We see growth opportunities with federally qualified health centers and other provider partners to serve Medicaid as well as a strong pipeline to add to our Reach ACOs. Regarding the announced sale of our California Medicare Advantage Business, the regulatory approval process for Molina's acquisition is proceeding as planned and we expect to close the transaction by first quarter of 2024. Our MA business had a strong quarter with 17% premium revenue growth compared to Q3 2022. We are performing in line with our expectations on medical costs with a year-to-date, medical cost ratio of 89.9% excluding prior-period items. Solid performance on our book of business with a high concentration of underserved and special needs consumers. Our Medicare Advantage team has been working for some time now on initiatives to drive improved utilization metrics and lower medical costs. We have seen the benefits of these efforts with utilization down approximately 10% year-over-year across the book, and operational improvements that have resulted in claims inventory down approximately 50%. In the third quarter, we also continued to make significant progress on the wind down of our ACA insurance business. Our claims inventory has continued to decline consistent with our expectations, and we have clear visibility to the remaining obligations in the business. We were pleased to announce in September that we paid down 80% of our final risk-adjustment obligations for the business and that our insurance subsidiaries entered into repayment agreements with CMS in four states to satisfy the remaining risk adjustment obligations. Jay will provide additional details on the repayment agreements, our current capital position, anticipated remaining costs and expected net obligations for the business. I'll now hand it over to Jay to provide additional details on our third quarter performance and our updated outlook.
Jay Matushak: Thank you, Mike, and good morning, everyone. I'll start with a discussion of our third quarter performance, provide an update on the wind down of our ACA insurance business and go over our balance sheet. I will then provide a review of our 2023 outlook. Bright Health Group Enterprise earnings for the thrid quarter was $269 million, with strength in care delivery segment capitated revenue offset by lower ACO Reach revenue, based on an expected revision to ACO reach benchmarks. Care delivery segment revenue was $67.1 million in the third quarter. We have had strong performance from a medical cost management perspective year-to-date and expect that we will realize the upside incentives on certain contracts in 2023. As a result, we started booking a prudent amount of surplus share in the third quarter. This positive momentum was partially offset by consumer attrition in some payer relationships consistent with our expectations. Net positive outcome in capitated revenue more than offset modestly lower service revenue and a small decline in ACO Reach distributable surplus to our own provider assets. Medical costs and operating costs were approximately in line with expectations and excluding the impact of goodwill impairment recognized in the quarter, the care delivery segment delivered operating income of $10.6 million in Q3. Results in our cash solutions segment are largely driven by our ACO Reach business. In our ACO Reach business, we contracted CMS and take on the risk related to our provider partners attributed Medicare fee-for-service members, medical cost performance relative to a blended regional and historical benchmark. To the extent the medical costs were attributed [indiscernible] lower than the blended benchmark, our ACO earned surplus from CMS. Medical costs exceed the blended benchmark, the ACO was adjusted to CMS. We also entered into downstream contracts with our provider partners that have varying levels of risk sharing relative the surpluses earned and deficits incurred. As Mike previously noted, due to Babylon bankruptcies, we have established a reserve against our receivable creating a bad debt charge of $22.4 million for the quarter. Additionally, with the end of the Babylon relationship, we now expect to retain full responsibility for the deficits of their attributed members for the balance of 2023, which negatively impacted third quarter medical costs and will be reflected as additional medical costs within our ACO in Q4. The bad debt expense and the additional Babylon assets are excluded from our adjusted EBITDA, these are one-time items that don't reflect the ongoing expectations for the business. Year-to-date we have seen solid performance in our ACO Reach business. And assets of Babylon impact in net contribution continues to perform in line with our expectations. Care solutions segment revenue in the third quarter was $200.8 million. Third quarter revenue was impacted by the [indiscernible] adjustment for an expected revision to the full year ACO Reach program benchmark, and we revised our full-year revenue outlook based on the new benchmark forecasts. Revised revenue forecast was offset by lower medical costs which our most recent and current cost estimates. As of the third quarter, our year-to-date gross profit in our care solutions segment is $4.6 million. Operating income was negatively impacted by certain one-time items related to our relationship with Babylon. However, adjusted for the impact of the Babylon related items in our year-to-date care solutions operating income is approximately breakeven. Enterprise adjusted EBITDA was $1.2 million in the third quarter and it is $1.9 million on a year-to-date basis. We would note that enterprise adjusted EBITDA includes significant corporate operating costs. And consumer care when combining the care delivery and care solutions segments, our adjusted EBITDA before corporate expenses was more than $12 million in the third quarter and approximately $36 million for the year-to-date period. We have taken action in the fourth quarter to reduce corporate operating expenses, rightsizing our corporate operations for the go-forward business, which we expect to support enterprise adjusted EBITDA in 2024. We currently plan to provide 4.24 guidance to gel with the release of our fourth quarter results. Turning to the ACA insurance business wind-down, while we continue to make significant progress in third quarter. As of today, we believe we are more than 98% complete on medical claims in the ACA insurance business. Our medical claims expense in the quarter was slightly higher than our prior forecast. On September 9, we announced the Bright Health paid $1.5 billion to the Centers for Medicare and Medicaid Services satisfying 80% of the final ACA insurance business risk adjustment obligations. We also announced that our insurance subsidiaries in Colorado, Florida, Illinois and Texas, entered into repayment agreements for a principal amount of $380 million with CMS with respect to the unpaid amount of risk adjustment obligations. The principal amount and repayment agreements is due in 18 months from September 15, 2023, and bears interest at a 11.5%. As of the end of the third quarter, our ACA insurance business had $289 million in regulatory capital. Net of our forecast for remain -- remaining medical costs and other anticipated operating and wind-down costs. We expect to have $220 million in excess capital that we will look to work with the state regulators to recover, including approximately $1.5 million in the markets with repayment agreements and approximately $115 million in the other markets where we have excess regulatory capital. In total excess regulatory capital netted against the $380 million principal of the repayment obligation results in a net risk adjustment obligation of approximately $160 million before interest costs. Now looking at our balance sheet. As of the end of the third quarter, we had $735 million in total cash investments, including amounts in our regulated entities. Our non-regulated cash and short-term investments were $113.6 million as of the end of Q3. We had $303.9 million drawn in our $350 million bank facility and $30.7 million in letters of credit on this facility committed to supporting our participation in ACO Reach program. We also announced during the quarter that we entered into a new supplemental credit agreement with NEA for $60 million, which was later expanded by $6.4 million with a new lender. As of September 30, we had $50 million borrowed on this credit agreement. This financing is expected to support the working capital needs of the company pending the close of the California Medicare Advantage business sales moving on. As Mike noted, we continue to work through the regulatory approvals for the sale of our California Medicare Advantage business, which we announced on June 30. We continue to expect to close the transaction by the first quarter of 2024. We expect the proceeds to bolster our balance sheet including potential uses such as paying down the ACA insurance business risk adjustment obligations, paying down our credit facility borrowings and general corporate users. We've adjusted our full year 2023 outlook this morning with our new revenue outlook, largely reflecting a tweak to the benchmark forecast for the ACO Reach business, which is offset by our lower medical cost forecast. We expect 2023 enterprise revenue between $1.14 billion and $1.19 billion. The forecast for our adjusted operating cost ratio was unchanged at 17.5% to 18.5%. And we continue to expect to achieve enterprise adjusted EBITDA profitability for the year. In care delivery, our full-year revenue outlook is a range from $250 million to $295 million. And in care solutions, our revenue outlook for the full year is between $890 million and $910 million. Then consumer care, we continue to expect the total of 335,000 to 355,000 total value-based consumers at year end, including approximately 60,000 from our Reach ACOs. And 275,000 to 295,000 from our value-based relationships with other payers including consumers in the ACA marketplace, Medicare Advantage and Medicaid. One reminder on our value-based consumers and revenue numbers, our care delivery business has substantial scale with more than 290,000 consumers served in the third quarter. Over time, we expect to transition those contracts, the total cost of care arrangements like we currently have in our Medicare Advantage care delivery business with gross revenue [indiscernible] treatment. Based on the value-based consumer served today, we believe we would recognize over $1 billion in additional revenue, which would more appropriately reflect the true scale of this business. Our consumer care business continued to perform well in the third quarter and year-to-date results have been strong, supporting our outlook for enterprise adjusted EBITDA profitability for the year. With that, here is Mike with some closing comments.
Mike Mikan: Thank you, Jay. I want to thank the whole Bright Health team for their hard work as we work to position the consumer care business for long-term profitable growth. And as the team continues to work on the wind-down of the ACA insurance business and the sale of the Medicare Advantage business. Our consumer care business builds on the strengths of our unique model at Bright Health. From the started the company, we have been building a value-driven fully aligned care model, serving consumers across multiple payer categories. We have a fully capitated care delivery business partnered with leading payers to serve Medicare Advantage consumers. The scaled business serving ACA marketplace consumers through our clinics and our care networks with meaningful opportunities for taking on greater responsibility for the total cost of care in our payer contracts, as well as growth opportunities through adding new consumers and payer relationships. We are also expanding our presence in Medicaid, where we support federally qualified health centers as they enter value-based care contracts and move up the continuum of risk-sharing arrangements. Our consumer care business is unique in the marketplace in serving consumers across all of these different life stages and health insurance coverage categories. We are focused on driving profitable growth through adding consumers across the payer categories that we serve and moving on the path to total cost of care responsibility and our payer contracts. With value driven care delivery solutions and Medicare Advantage, ACO Reach, Medicaid and ACA marketplace are addressable market is one of the largest in value-driven care delivery. As Steven noted, given the pending regulatory approval, the sale of our California Medicare Advantage business, we won't be conducting a Q&A session today. We will look to update you as soon as possible on any developments. Thank you for joining the call and for your interest in our company.
Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
End of Q&A:
InvestingPro Insights
InvestingPro's real-time data and tips offer additional insights into Bright Health Group's financial status and performance. The company's market cap stands at $60.51M USD, showcasing a remarkable revenue growth of 1945.27% over the last twelve months as of Q2 2023. However, the gross profit margin is relatively low at 10.42%, indicating potential areas of improvement.
InvestingPro Tips suggest that despite the company's revenue growth, analysts do not anticipate Bright Health Group will be profitable this year, and the valuation implies a poor free cash flow yield. Nonetheless, the company's stock has demonstrated a strong return over the last month, offering a silver lining to investors.
Investors seeking more in-depth analysis can access numerous additional tips and metrics through InvestingPro's comprehensive financial analysis platform. With a wealth of valuable insights, InvestingPro offers a valuable resource for anyone navigating the financial markets.
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