Oak Street Health, Inc. (NYSE:OSH) Q3 2022 Results Conference Call November 8, 2022 8:00 AM ET
Company Participants
Sarah Cluck – Head of Investor Relations
Mike Pykosz – Chief Executive Officer
Tim Cook – Chief Financial Officer
Conference Call Participants
Lisa Gill – JPMorgan
Ryan Daniels – William Blair
Gary Taylor – Cowen
Justin Lake – Wolfe Research
Jessica Tassan – Piper Sandler
John Ransom – Raymond James
Sandy Draper – Guggenheim
Adam Ron – Bank of America
Sameer Patel – Evercore
Andrew Mok – UBS
Connor Massari – Morgan Stanley
David Larsen – BTIG
Jamie Perse – Goldman Sachs
Craig Jones – Stifel
Operator
Hello, and welcome to today’s Oak Street Health Third Quarter 2022 Earnings Conference Call. My name is Elliot, and I will be coordinating your call today [Operator Instructions].
I would now like to hand over to our host, Sarah Cluck, Head of Investor Relations. The floor is yours. Please go ahead.
Sarah Cluck
Good morning, and thank you for joining us today. With me are Mike Pykosz, Chief Executive Officer; and Tim Cook, Chief Financial Officer. Please be advised that today’s conference call is being recorded, and that the Oak Street Health press release, webcast link and the other related materials are available on the Investor Relations section of Oak Street Health’s Web site. Today’s statements are made as of November 8, reflects management’s view and expectation at this time and are subject to various risks, uncertainties and assumptions. In addition to historical information, certain statements made during today’s call are forward-looking statements. Please refer to our 2021 annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission, where you will see a discussion of certain risks, uncertainties and other important factors that could cause the company’s actual results to differ materially from these statements. Certain statements made during this call include non-GAAP financial measures. These non-GAAP financial measures are in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with GAAP. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.
With that, I’ll turn the call over to our CEO, Mike Pykosz. Mike?
Mike Pykosz
Thank you, Sarah, and thank you to everyone for joining us this morning. Joining me on today’s call addition to Sarah is Tim Cook, our Chief Financial Officer. I continue to be impressed by the impact our team is making on our patients and the communities we serve every day. Their hard work and dedication, used outstanding results from our care model, driving performance organization. For Q3, our performance led to results above the top end of our guidance range for revenue, centers, at-risk patients and adjusted EBITDA. The two main drivers of both our impact and the financial results our centers generate are the number of at-risk patients we serve and the effectiveness of our care model in improving outcomes and lowering hospitalizations, leading to lower third-party [metal] costs. For Q3 and year-to-date 2022, we’ve achieved strong results on both of these drivers, leading to [some level] performance in line with the cohort expectations we shared coming into the year. Our patient experience and the resulting patient engagement enable both drivers of our model. Our patient acquisition approach is predicated on educating older adults on the superior patient experience we provide at Oak Street, with wider such as longer visits, additional services specially in insurance navigation and easy access generally only found in concierge provider services. We communicate our differentiated patient experience through our community outreach model as well as our central marketing channels.
We launched our first meaningful television brand advertising campaign in Q3. The theme of the advertising was i differentiated level of patient experience we provide compared to traditional doctors’ offices. We plan to continue and expand upon this campaign in 2023 and beyond. On the care model side, our differentiated patient experience leads to much higher patient engagement, which enables our care model. Oak Street cares for a patient population that historically has had less access to and engagement with the health care system. Even in the face of these headwinds, Oak Street drives strong patient engagement. For example, using annual wellness business as a proxy for the level of engagement for our patients, we completed over 3x the percentage of annual illness is on our patients compared to Medicare overall. Patients engaged in our model have significantly lower hospitalization rates and better patient health outcomes. Oak Street patient experience allows us to drive significantly higher engagement than the average provider leading to increased impact. As we’ve shared in the past, we can offer a superior patient experience because of our consistent de novo approach to rebuilding health care. As we continue to scale, we will continue to invest in our technology, data infrastructure and culture, allowing us to further differentiate our experience. We believe this will continue to drive results on patient acquisition and patient engagement, while further differentiating Oak Street from existing primary [services].
In addition to our focus on patient experience, we continue to invest in Canopy, our technology and data platform, to both improve the consistency and scalability of our core model and add additional capability to drive better outcomes, such as point-of-care [deficient] support for our providers. Our largest investment in capabilities to date with our acquisition of RubiconMD last year. We’ve completed integrating the core eConsults approach in our Canopy referrals module and have seen a further uptick in eConsults. This both saves money in referrals, but just importantly, provides an outstanding and differentiated patient experience by saving our patients significant time and hassle by giving our providers additional information to help them care for their patients. When using eConsult, we get feedback from specialists within hours compared to the months that it often takes for specialist patients to complete business with specialists. Additionally, leveraging RubiconMD avoids the cost and hassle for patients as well as the duplicative evaluation testing by specialists. We are pleased with our performance in both the third quarter and year-to-date. In the third quarter, we generated record revenue of $545.7 million in the quarter, exceeding the high end of our guidance range. Our revenue growth continues to be driven by our organic B2C marketing approach. This revenue growth, combined with expenses in line with our expectations, contributed to an adjusted EBITDA loss of $88.3 million for the quarter, which is favorable to the top end of our Q3 guidance.
Our performance for this year continues to be in line with the projected center ramps for 2022 by [cohort] we shared earlier this year. We believe our continued performance on these center ramps on what is now 167 centers across 21 states demonstrates the effectiveness, consistency and scalability of our model and approach. We think the depth and breadth of our clinical model and the consistent approach to executing will drive differentiated results over the medium and long term, and that the business has strong momentum for pulling it forward. Consistent performance along these center ramps going forward will create an outstanding financial return on the capital invested in new center development. We remain confident in our ability not only to scale our model, but to continue to invest in our model and technology platform and further differentiate results from traditional and primary care.
Now I’ll turn it over to Tim to cover some more of the details regarding our financial performance in the second quarter.
Tim Cook
Thank you, Mike, and good morning. As Mike shared, we were pleased with our third quarter as we delivered results above the high end of guidance for all metrics. In terms of membership, our at-risk patient base, the key driver of our financial performance, grew by 44% to 145,000 patients, driven by our B2C marketing model and growth in a number of our centers. At the end of the third quarter, we operated 161 centers, an increase of 51 centers or 46% versus the 110 centers we operated at the end of the third quarter of 2021. Capitated revenue of $537.9 million grew 43% year-over-year, driven primarily by growth in our at-risk patient base. Capitated revenue in the third quarter of 2022 included a $5.9 million reduction related to prior periods due to matters relating to the Direct Contracting program. Specifically, the retrospective adjustments made by CMS and the retroactive removal of a small number of patients following a review of our patient panel. Adjusting for prior period impacts in 2022 and 2021, third quarter capitated revenue grew 51% year-over-year.
For the quarter, total reported revenue grew 40% year-over-year to $545.7 million. Total revenue adjusted for prior period changes grew 48%. Our medical claims expense for the third quarter of 2022 was $427.4 million, representing growth of 38% compared to prior year. Medical claims expense in the third quarter of 2022 included a favorable $12.8 million reduction in prior period medical claims expense due to 2022 cost developing more favorably versus our estimates and the aforementioned Direct Contracting patient retroactivity. When adjusting for prior period changes in the third quarter of 2022 and 2021, medical claims expense grew 47% year-over-year in the third quarter, approximately 400 basis points lower than our comparable capitated revenue growth. Our cost of care, excluding depreciation and amortization, was $113.6 million for the third quarter, an increase of 49% versus the prior year, driven by growth in the number of centers we operate and the number of team members supporting our significantly larger patient base. Sales and marketing expense was $44.1 million during the third quarter, representing an increase of 45% year-over-year, as we continue to invest in this area to support patient growth at a much larger footprint of centers. Corporate, general and administrative expense was $81.7 million in the third quarter, an increase of 6% year-over-year. As a reminder, this line item includes the majority of our stock-based compensation, which inflated due to the treatment of our pre-IPO management equity plan. With our second anniversary as a public company, there has been a step down in our pre-IPO equity plan stock-based compensation, resulting in a 20% decline for total stock-based compensation relative to the third quarter of last year.
Looking ahead, we expect to see another material step down in Q3 of 2023 when the bulk of the remaining pre-IPO equity awards best. And we expect normalized stock-based compensation from Q4 2023 forward. When factoring in the prior period changes to revenue, we improved our corporate, general and administrative expense, excluding stock-based compensation as a percent of total revenue, by approximately 90 basis points in Q3 2022 compared to Q3 of 2021, continuing our expected trend of declining corporate costs as a percent of revenue. I’ll now discuss three non-GAAP financial metrics we find useful in evaluating our financial performance. Patient contribution, which we define as capitated revenue less medical claims expense, grew 65% year-over-year to $110.5 million during the third quarter. Excluding the impact of prior period revenue and medical costs, patient contribution grew approximately 70% year-over-year. Platform contribution, which we define as total revenue less the sum of medical claims expense, the cost of care, excluding depreciation and amortization and stock-based compensation, was $6 million, an increase of 94% year-over-year. As an individual center matures, we would expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers as well as improving our per patient economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction and operating related costs, onetime litigation costs,and stock-based compensation, but excluding other income to net loss, was a loss of $88.3 million in the third quarter of 2022 compared to a loss of $64.4 million in the third quarter of 2021.
Moving to cash flow and the balance sheet. We paid out the RubiconMD contingent earnout as all the performance milestones were achieved, and the contingent consideration was awarded in a cash and stock combination with $27.5 million paid in cash and approximately 1.2 million shares or $32.5 million issued to certain sellers of RubiconMD during the quarter. As we shared last quarter, we expect that over the course of the year that our adjusted EBITDA loss will approximate our uses of operating cash flow, and while those figures diverged in the first half of the year due to working capital seasonality, we expect them to converge over the second half of the year. In Q3, cash used for operating activities was $33.9 million, which included approximately $6 million related to the RubiconMD earn-out compared to EBITDA loss in the quarter of $88.3 million. For the 9 months ended September 30, cash used by operating activities was $213.3 million and our capital expenditures were $67.6 million, both in line with our expectations. Additionally, at the end of the third quarter, we entered into a loan agreement providing us with the $300 million of new debt capital which we can draw on tranches over time. We were required to draw $75 million at the closing of the loan. This debt raise was important as with our cash on hand and the capital available to us via this loan, we are confident that we have sufficient capital to execute our growth plan of 30 to 40 new centers in 2023 and 2024, it will not need to raise incremental equity capital between now and when we are profitable. In total, we finished the third quarter with significant liquidity in the business. As of September 30, we held approximately $543 million in unrestricted cash and marketable securities, and an incremental $225 million of availability under our loan agreement.
I also want to provide an update on two key trends from 2021 and their impact on our 2022 results, COVID costs and new patient economics. First, COVID continues to impact on medical costs, and we remain cautious on expectations for the remainder of the year given the surges we experienced in the fourth quarters of both 2020 and 2021, as well as the recent headlines around the new variants and the flu. Year-to-date, we estimate that COVID represented $21 million in medical claims expense. Regarding new patient economics. For those patients who are new to Oak Street in 2022, performance to date is in line with expectations we shared at the beginning of the year, which were better relative to what we experienced in 2021, but not back to the level we experienced pre-pandemic. I would note that for patients who were new to Oak Street in 2021, we were generating historically normal profitability on that cohort of patients in 2022 despite the headwinds we experienced from them last year, which speaks to the efficacy of our care model and the degree to which we engage patients relative to the market at large.
Moving along to our financial outlook for the remainder of the year. We are increasing our full year guidance for at-risk patients to 157,000 to 159,000 patients, and raising our total revenue range to $2.15 billion to $2.155 billion. Our full year expectation for centers remained at 169, and we are raising and significantly narrowing our adjusted EBITDA range to between a loss of $292.5 million and a loss of $287.5 million. We remain confident in the underlying trends we are seeing in the business and committed to providing exceptional care for our patients.
And with that, we will now open the call to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today comes from Lisa Gill from JPMorgan.
Lisa Gill
I just want to go back, Tim, to your comment around COVID costs and utilization trends for the fourth quarter. So can you just talk about what’s implied in the fourth quarter guidance around COVID, flu, et cetera, maybe we just call it respiratory at this point? And anything else that you would call out on utilization? And then just as a follow-up, are there any other DC, Direct Contracting, members that you believe will roll off into the fourth quarter? Maybe just help us understand a little bit the fact that you were proactive and your thoughts that perhaps they wouldn’t meet the criteria from a CMS perspective. I just want to understand that a little bit better?
Tim Cook
For Q4, utilization and cost estimates for COVID or, to your point, respiratory illnesses, I’d say our expectations, our experience is consistent with our experience year-to-date as well as some element of conservatism just given historical experience as I mentioned in Q4. Obviously, there’s a lot to learn. We have about five weeks of data, which is pretty inconclusive but supportive at this point, and we’ll see how the remainder of the quarter evolves. Regarding Direct Contracting, we will continue to evaluate the panel. And part of it is where we sit at certain points in the year, right? We still have time over the course of the year to evaluate where we think that, that patient count will end up and ensure that if there are reasons why we think patients might drop to proactively mitigate those reasons, and so we will continue to do that. But at this point, we wanted to make sure that we were being proactive about managing this particular risk.
The reality is that in Medicare Advantage, the patient decides to leave Oak Street, that patient needs to call the health plan, make a — make a decision, call the health plan, proactively change their doctor. And what happens from that point on is, prospectively, that patient moves off Oak Street’s rosters. Direct Contracting is different. Next year, CMS will look at our patient panel for 2022 and may make a determination that certain patients shouldn’t have been included in our roster despite the fact that CMS paid us for those patients during 2022 and it will retroactively drop those patients for all of 2022. Ultimately, given the relative size of our Direct Contracting population, it isn’t that impactful from an EBITDA perspective, but obviously, it creates choppiness. And we wanted to do what we could to make sure we’re keeping that ahead of us as we continue to learn more about the Direct Contracting program.
Operator
Our next question comes from Ryan Daniels from William Blair.
Ryan Daniels
Mike, I wanted to ask you about the programs for all-inclusive care for the elderly. I noticed that Illinois is expanding. It looks like you guys are participating in that. So can you go into a little bit more detail about that opportunity, number one? And then number two, will that be offered out of an existing Oak Street Health center? Or is that going to be a totally new asset base?
Mike Pykosz
I mean for those of you who are less really familiar with the PACE program. I look at it as almost an extension of what we do at Oak Street Health for some of our most vulnerable and highest-need patients. And we look at it as a natural extension of what we do, and there’s a way to get a lot more resources for those patients and help us care for them. So we were very excited when Illinois decided to get — to offer the PACE program as we think it can be a really valuable offering for our patients. And so there’s some pretty specific rules around PACE of what you need to provide. So we’ll need at least one kind of dedicated PACE center, but we can also offer care out of our current centers as satellite PACE centers. So I think it will be a really great complement to what we’re doing, allow us to leverage our current centers. And frankly, for a lot of our patients who really can benefit from PACE, we’ll be able to get them a lot more resources, and that can drive better clinical offers to them, most importantly, but also better financial results. So we think it’s a great kind of complement synergy opportunity. Really excited to be part of the program, although it’s a relatively slow rollout program. So I don’t expect to have a huge impact in the near term.
Operator
Our next question comes from Gary Taylor from Cowen.
Gary Taylor
Two quick ones. One, could you just touch on the CHW acquisition a little bit? Just what exactly that is and the motivation for that one.
Mike Pykosz
It is a senior-focused primary care group in Washington Heights in New York City. And I think the simplest way to say it is that they were a group that started a couple of years ago, and I think — and had a very similar approach to what we’re doing at Oak Street Health and started with one center and served a meaningful patient population. But I think as they were working on the model, realize just the complexity of actually getting to be a risk-taking provider group and the costs associated with scaling that type of model. And I think realized they could provide a better care quality and do it faster and a higher degree of success if they joined up with Oak Street first trying to do it on their own. So from our standpoint, it was a great opportunity to take something over that center-based senior-focused, most importantly, a great culture fit between the team there and our teams. So I really felt that it’d be kind of essentially a way to kind of get a center that was a little further along on the maturation curve. So we love those types of opportunities. We did something similar in Philadelphia a couple of years ago. But there’s not many out there that kind of fit that criteria, would be senior-focused, center-based and have that strong culture fit with what we do. So we will selectively look at them when they come up, it’s one center. It’s relatively small, but it’s a nice way to kind of accelerate the patient ramp if we can find them.
Operator
We now turn to Justin Lake from Wolfe Research.
Justin Lake
A couple of things. One, can you — congrats on the revolver. I think it makes a lot of sense. I just want to make sure I’m understanding it from the — from a financial perspective in that, previously, you had said 30 to 40 centers, and you think you get to breakeven in self-financing by 2025 and, therefore, don’t need to raise capital. Has something changed that you need the revolver now? Or is this just insurance? And then secondly, last year, I think it was at JPMorgan conference you gave us an overview when you kind of talked through your maturity curve and give us an update on how the different vintages were performing. Can we expect something similar at JPMorgan? What would be the timing on that?
Tim Cook
So on the debt deal, from our perspective, the term loan now is more just a function of prudence and good corporate housekeeping from our perspective. And our expectations haven’t necessarily changed. We felt as though, particularly the volatility in the market and the uncertainty that it was better to have it than do not. So that’s just — that’s the response of the debt deal. Regarding the ramps, yes, I mean, to your point, we did share our expectation for our cohort level performance in 2022 in January. Our guidance for 2022 is based upon those ramps, just simply some product of the profitability of each cohort multiplied by a number of centers in each cohort. And given our performance thus far, we’re tracking well against those cohorts. And our expectation would be that, in January, we update folks on performance — early results for performance in 2022 against the 2020 targets as well as our expectations for 2023.
Operator
Our next question comes from Jessica Tassan from Piper Sandler.
Jessica Tassan
I was hoping you could give us some detail about the nurse practitioner fellowship program you guys launched in September. What’s the receptivity been like? And just how scaled is the program today and maybe plan for future growth.
Mike Pykosz
It’s a program we’re incredibly excited about. Because one thing we’ve identified as a heat interest in nurse petition, especially new grad nurse practitioners, in the Oak Street model and practicing in value-based care and practicing in team-based care and being able to make the impact on our patient population that we do. But I think one of the big differences between nurse practitioners and doctors is nurse practitioners firstly don’t have a residency. And so they’ve only been a nurse for a period of time, go to NP school and then come right back out and see patients. And if you’re in more of an urgent care or that type of place, what you’re seeing is not that difficult and you can — you don’t really need a lot of extra training. But obviously, our patient population is very different than that, it’s complex and protects a number of challenges. And so it can be hard for a new grad practitioner to come in to Oak Street and kind of hit the ground running. And so to bridge that gap, we’re actually partnering, I believe, with the University of Michigan and have created kind of similar to what, I guess, provides the residency more of a rotational program to give people extra support, give people extra guidance, give people extra mentorship but help them get a lot of reps on our patient population. And so really, we’ll extend are kind of hiring practices and our development practices to new grad NP students. So we’re pretty excited about both the program now, but also what the implications for the future and continue to build the best provider team in health care.
Operator
We now turn to John Ransom from Raymond James.
John Ransom
Just a couple of ones for me. You mentioned last night that you paid the earn-out on the Rubicon deal this quarter. Could you just kind of give us a high level review of how that deal has gone relative to your expectations? And in particular, are they giving you insight into real-time costs that you didn’t have a year ago? And I have a follow-up.
Mike Pykosz
I think it’s going very well compared to our expectations. I think the health thesis behind the Rubicon acquisition was that so much of the special spend out there is not needed, right? It’s redoing work where you really just want a second opinion, you really just want to double check that you’re managing these complex patients in complex conditions correctly as a primary care doctor. And the only mechanism to do that in kind of a traditional fee-for-service medicine is to send them to a specialist, where, from a patient perspective, they have to make a new appointment in someone takes months to get in the appointment. They’ve got to get to the doc office, there’s less specialist, so it’s usually west convenient. They got to wait in the exam room. They got to do a whole battery of testing and we do those things, et cetera, et cetera, et cetera. So it’s both high cost and poor experience. And really what you want the second opinion on a lot of specialists, it’s not all, but it’s been a meaningful portion. And so the eConsults are a perfect way to do that. I think what we identified is one of the barriers that are happening more prevalently is just — it’s a lot of administrative working hard for primary care to actually get the eConsult, right? There’s only so much adherence you’re going to have the guidelines when you have to go into a new portal, retype information, et cetera, et cetera.
So we felt to really get the full benefit of eConsults and the patient experience and medical cost impact, we really need to integrate it into our core technology platform. And that’s why we decided to make the acquisition. So as I mentioned, I think in my script, we just finished the kind of Phase 1 integration work. We’re now — it is just part of our referrals module. There’s no extra portals, et cetera. And as effective, we’re seeing a really strong uptick in the amount of e-consults being used, which we believe will save direct specialist costs because a lot of the e-consults will avoid having to send them to a specialist for the second opinion. But more importantly, I think we’ll create a great patient experience, where, within hours, we can get the results back from specialist versus what takes often months of specialist. And just as importantly, it’s a really great resource for our providers to get extra information on how to manage some of their toughest patients.
So far, we feel great about the results. It’s been a process, as we’ve talked about, to drive the integration over the course of the year. And so kind of the number of e-consults has gone up as the years progressed and continues to trend up month-over-month. We don’t obviously have claims for the near-term periods to compare, so the way we actually kind of validate the cost savings, we checked eConsults happens, is there ever a specialist claim and validate that it actually is reducing cost. So — we know it does in the early days of Q1, Q2, although on a much smaller volume of the eConsults. And so we have a lot of confidence that it’s going to drive results kind of Q4 and really most importantly, next year and beyond at Oak Street.
Operator
We now turn to Elizabeth Anderson from Evercore. Elizabeth? We move on to Sandy Draper from Guggenheim.
Sandy Draper
A question — when I’m just looking at the patient growth, one thing that jumped out sort of over the last three quarters, is you’ve had really strong growth on the fee-for-service side. And it seems to me that’s a potential feeder source of moving people into the at-risk population. I’m just trying to — would love some color on how you can market to those people, why someone who comes on in fee-for-service would not switch over to at-risk? And obviously, midyear, some of those may not, but is it reasonable to think that the majority of those move into an at-risk model at the beginning of next year? Just trying to see how much of a leading indicator that is to growth for the at-risk patients.
Mike Pykosz
I think you’re thinking about it correctly as that population being up there. But I want to point there’s always kind of, call it, structural percentage of patients who can’t be at-risk. And there’s a couple of reasons for that. One, on Direct Contracting, as we talked about, there’s a fair amount of people who are on traditional Medicare that are seeing Oak Street Health, have actually filled out the voluntary line and informed they want to join PCP. But as of today, if you were going to a primary care doctor in the past, who was part of the health system that was part of the Medicare Shared Savings Program, that would trump that backward-looking visiting a primary care doctor is part of MST, which trump forward-looking your patient decision to join Oak Street, which — again, is probably how I would do it if I was in it, but that is how the rules work today. And so because of that, you have to wait until the patient becomes claims lines, it would take two years.
And so we do see some set of people who are — patients who are kind of fee-for-service who want to be part of Direct Contracting, it’s just they’re waiting to get through. And obviously, we don’t differentiate the care. That’s not a patient decision, right? It’s just — it is what it is. There’s another subset of people that don’t have full Medicare Part B, so they’re not eligible for Direct Contracting or in total Medicare kind of — these are not huge buckets, but they’re buckets that there’s not really much we can do about to move the risk. There are situations where people have completed a visit with Oak Street Health, and we’re waiting for them to flow through. Again, it’s a big one for Direct Contracting, where if someone sees us today, fills out the voluntary [alignment] form, they won’t go to risk until January.
So when we report Q4 results, that’s going to be a person who is listed as fee-for-service. But to your point, that is a great example of the feeder of growth, right? They’re going to flow through to risk contracts. Similar to some of our new markets, when we go to new markets and we don’t have risk, day 1, we have risk kind of the first January 1, and it has usually an administrative thing. There’s only a dozen patients. It’s really not worth all the processes that go to risk. So we build the population first. And those contracts flip. So I think here a number of reasons why we have patients who are not at risk. But I do think that over time, the majority of the people eventually flow to risk, although obviously, there will be new ones that come in that are not a risk, right? And then there’ll be some smaller portion that just are kind of structurally always not a risk.
Operator
[Operator Instructions] We now turn to Richard Close from Canaccord Genuity. We now turn to Kevin Fischbeck from Bank of America.
Adam Ron
This is Adam Ron on for Kevin Fischbeck. If I understood correctly, I think you’re saying new patient economics are still hovering between 2019 and 2021 levels. But I thought that, that was the main swing factor into the unit economic range that was the basis for 2022 guidance. So if that’s not coming in better, then what is giving you confidence to raise the range? And if I’m understanding that correctly, what do we need to see to get back to 2019 levels? Is it better risk coding? Lower year 1 utilization? Is it patient capacity? Any color would be appreciated.
Tim Cook
So for 2022 guidance, if you recall, we had a range of outcomes we provided in January. The high end of which was assuming we got back to 2019 levels of new patient economics, and there were no COVID costs. We never thought that, that range was necessarily relevant for 2022 because when we provided that in January, obviously, the Omicron surge was underway and we weren’t — we didn’t expect new patient economics to swing back that quickly. So our guidance for the year was predicated upon the low end of that range of outcomes provided in January. It’s about the midpoint. So as we think about performance for the year, for 2022, us coming at the high end of guidance, that would be at about the midpoint of that — of those center economic ramps that we provided in January. So it would make sense that patient economics are somewhere between 2019 and 2021 levels, that would be in line with the midpoint of that range. So that is the answer to that. I’m sorry, what was your other question?
Operator
We now turn to Elizabeth Anderson from Evercore.
Sameer Patel
This is Sameer Patel speaking for Elizabeth Anderson. I was wondering just sort of on the same framework for Q4 rest of fiscal year 2022. Do you have any color you can provide on MLR, and directionally, which way this is going to be going and then the puts and takes related to it?
Mike Pykosz
So we do not guide on MLR. So there’s — not be able to provide any input on where we think MLR will be for Q4. As we discussed, there’s a number of factors that affect MLR in our business that are different than what you might see in the market more broadly, at least with MA plans, right, where new patients, which are a large portion of our total patient mix, are going to increase MLR. So to the extent that we are outperforming our new patients, we’d expect MLR to be higher than expectations. And so I think the market tends to look at each of these metrics on a siloed basis. And the reality is there’s interplay. So we don’t talk about MLR. I’d say, look, stepping back for a moment, medical costs are the single largest expense line on the P&L. And for us to now be centered on the high end of our prior guidance range for full year EBITDA, you cannot be there without having MLR or medical cost results, generally speaking, in line with your expectations, right? It’s very hard to offset headwinds on MLR through expense management, just given the relative size of each of those buckets. So from our perspective, we’re in line with where we thought we’d be for the year, which is great. But beyond that, I’m not going to provide any specifics on where we think MLR will be for Q4.
Operator
Our next question comes from Andrew Mok from UBS.
Andrew Mok
Question on MA Star scores given some of the recent volatility for the 2024 plan year. I understand that the impact is ultimately based on county level contract exposure and plan benefit design, but can you help us understand how this works mechanically? Does the starting point for your capitated contracts with plans include rebate revenue, such that if a contract declines in Star scores, that lower rebate revenue then flows through to the clinic?
Mike Pykosz
I think it’s a bit more complicated than just thinking through Star scores go down, revenue goes down and that flows to Oak Street. But I think there’s a big portion of that and a big governor on our economics, which is the plan bid. So oftentimes, when there’s higher Star scores or higher revenues, plans will reinvest those dollars into a better, more compelling benefit offering, more supplemental benefits. And so yes, there is more revenue to treat when that happens. There’s also more cost to Oak Street, because obviously, there’s cost to those supplemental benefits as well. And the reverse is true. So we’re somewhat buffered and insulated from kind of rate changes and, in this case, Stars performance changes, because oftentimes, there’s adjustments to the benefits. And those adjustments can be reductions in the benefits or just a lack of an increase in the benefits that would have happened otherwise. And so we get the question on both sides, oftentimes, 2023 is going to be a great rate year, will that mean it’s going to be a wonderful year for Oak Street? And the answer is, yes, revenue will be higher but so will cost because the plans will be more aggressively. And in the future, we have a bad rate year, the opposite will be true. There won’t be aggressive growth of benefits likely because of that, and therefore, it will kind of buffer out. And so I think the same deal happen with the Star scores to that extent. So when these changes happen, it has a much more limited impact on the bottom line of Oak Street than kind of the top line of the plan.
Operator
Our next question comes from Michael Ha from Morgan Stanley.
Connor Massari
This is Connor Massari on for Michael Ha. I just wanted to look at the AARP partnership. Are there any updates or visibility on the membership growth associated with this? And in the future, will there be a way for us to kind of track the membership contribution that comes from that partnership?
Mike Pykosz
We don’t break out membership by channel, and I don’t expect to do that into the future. The AARP part, one, as we talked about, we’re very excited about because the AARP brand name is the most trusted brand name for older adults. They have an incredible reach in that organization. And so as we continue to go forward and kind of activate more and more pieces of AARP, again, we just get increasingly excited about the opportunity there. And I think it is something that’s very differentiating. We are the only and exclusive group to kind of be able to — from a provider standpoint, to leverage the AARP name. And so that’s a — we think a long-term built-in advantage. And with the conversations we’ve had with AARP, AARP leadership, I think they share our excitement. I think they’re really excited about the Oak Street Health mission and excited about kind of helping more and more AARP members and leveraging their incredible reach to further educate people about the importance of primary care and preventive medicine, and what we do here at Oak Street. So again, we’re in the early days, I think, early innings of this partnership, so to speak. I mean, if I had to — so as we put baseball game innings and things, I’d say we’re still in the first inning on this one. But we’re incredibly excited as this game progresses to see the impact it’s going to make. I think it can be a really true differentiator in the medium term.
Operator
We now turn to David Larsen from BTIG.
David Larsen
Can you please provide your thoughts on the announcement yesterday where VillageMD is acquiring Summit Health, and your thoughts on Walgreens investment into the space? What impact will that have on you, if any? And it seems like CVS is interested in the primary care space. And then just quickly, I think in the JPMorgan deck from last year, you highlighted that there were 19 centers that were in a year 6-plus vintage range, with a platform contribution of around $6 million to $7 million for 2022. How is that sort of cohort or vintage range trending relative to expectations?
Mike Pykosz
On the first one regarding the acquisition, I think that really highlights a couple of things. One is just the market size and market opportunity for primary care, again, you have — you all read the stats probably more than I have, but a meaningful acquisition in a group that essentially urgent care centers in New York City and a large multi-specialty group in New Jersey. So kind of really, really kind of one market. And we’re in New York City today. It’s been a phenomenal growth market for us over the last couple of years. We just got involved, and we’re — I think we’re just — what will grow in Europe from a center perspective and a patient perspective. And so again, I think we actually [coat] this quite well with them. I don’t look at them as competitive at all today. So again, I think that just highlights kind of the number of different primary care offerings and the size of the market. And I think the fact that you’re seeing more interest in M&A side, I think more and more organizations are coming to something we would totally agree with, which is the key to addressing the cost and quality channels you have in health care is through primary care. And so innovative primary care assets can really drive a huge amount of value to the system. So again, we totally agree with that. And you just highlight the size of the market here and the kind of so many different approaches to leverage in primary care.
To your second question, as Tim said earlier, I think, on this call, we will share kind of updates on how we’re doing by vintage in January and as well as kind of expectations for 2023. But I think you should strongly imply based on the fact that we’re kind of hitting our quarterly numbers and just slightly raised our range, that our cohorts are progressing as we describe them progressing. So I think that would be a very fair assumption to make, but those 19 are kind of in the range we talked about. And I think that’s one of the things that is making us incredibly confident in the trajectory of the business, as we’re seeing what we hope would trend out this year, it’s kind of getting to a more normalized period, it’s trending that way. And we’re seeing really strong performance. And it’s been a — it’s been a tough operating year with all the things going on in the economy in health care. And despite that, our teams have just done an incredible job driving incredible results across all our vintages. The new vintages are going well, the mature ones are going well. So again, we’re excited to share the results, but I think you should imply from the results today and guidance that it’s going well.
Operator
We now turn to Jamie Perse from Goldman Sachs.
Jamie Perse
You opened 17 centers in the quarter, that’s like 12% sequential growth. So clearly had an impact on the P&L. So I’m trying to understand that a little bit. First on patient growth, how much of that came from the new centers? I imagine they’re slow in the early days and so most of the growth is attributable to earlier centers, if you can comment on that. And then on cost of care, same type of question. Just if you can remind us what those first few months of cost of care center-level costs look like for new centers. If we bridge from 2Q to 3Q, is that the difference? And then lastly, just on Direct Contracting, you’ve always described it as higher revenue, higher cost, but similar margin contribution. Is that still the right framework to be thinking about Direct Contracting, so ACL reach going into next year?
Mike Pykosz
On the growth front, I would think about, especially on the growth side new center adds, other than the small handful of centers we have that are basically full, started grow to a similar amount per month every year. There’s not like a slower or a much faster ramp for new centers, it’s generally pretty consistent from kind of your first couple of months to a couple of years in on kind of the number of patients you’re adding per center per day. So I would just kind of look at it more proportionately on the growth front. On cost of care, I mean, yes, the more centers you open up in any given period, the higher the cost of care you have by definition because you have people working at those centers. Generally, cost of care is less at a newer center because you don’t hire all six care teams day one, right? You hire one the first month and you had another one a month or two in, et cetera, et cetera. So you do ramp cost of care over time with centers. So that wouldn’t be totally proportionately less cost of care for new centers. And I think your frame of reference on Direct Contracting is correct directionally. I think we see kind of when you adjust it for patient tenure, I think you see similar dollar contributions relatively similar for Direct Contracting you do for MA.
Tim Cook
One thing I’d add is that to the extent that we have more centers in a period than otherwise expected, that would lead to greater losses in the period, all else equal, just given the fact that, obviously, new centers are going to — we’re going to invest in those centers for the first couple of years to get to the breakeven. So more centers, all else equal, would be a greater loss, just to make sure that was clear.
Operator
Our next question comes from Craig Jones from Stifel.
Craig Jones
I just wanted to ask around the new debt. It looked like there was a covenant in there around trailing 12-month contribution margin at certain — once you drawn on certain amount. So I was wondering if you could give us what that would be at, say, $100 million, $200 million or fully drawn. And then if you do end up having to draw that over $100 million, would that make it more likely you would grow your center growth closer to 30% as you’d have to be more focused on profitability, or is it a fairly easy covenant to achieve even at 40 centers?
Tim Cook
The covenant is set assuming 40 centers. So the simple answer is no, we wouldn’t have to necessarily adjust our center pace depending upon how much of the loan we drew or ultimately draw. We are not — we did not disclose what those covenant levels are set at.
Operator
Our next question comes from John Ransom from Raymond James.
John Ransom
Back in the queue. So my second question is, last year, you guys had the issue, of course, with delayed visibility into medical costs, just given the delay at the payor level. So I’m just wondering, a year down the road, kind of how you’re thinking about that issue. And if you knew X percent of what you needed to know a year ago, what do you know this year? Or is it just one of the structural issues that you just sort of have to cover with, getting bigger and more actuarially predictable and just kind of brute-force reserves?
Mike Pykosz
Yes, John. Appreciate the question. Patient protection actually been almost 18 months since the kind of late Q1, early Q2 challenges in 2021. Time flies when you’re having fun, I guess. But I think that — when we look back at that period, I think it really was absolutely an anomaly was the biggest challenge there. We obviously have full run out now and have full visibility in that. And as we discussed, when the vaccines came back, people went back to specialists in much higher numbers than they’ve ever done before. And it was not just — it was actually the percentage of referrals that got completed, it was just much, much higher. And when we book Q2 2020, I think we prudently decided to assume those trends would continue throughout the year. They ended up not continuing throughout the year and end up being a two month issue. And actually, probably we ended up performing better than we expected or we shared kind of in our results. So in hindsight, we could have kept our earnings range is the same and not made changes, but I think that felt like the right decision at the time. So the more — the further we get away from that, the further, I think it really was a kind of a onetime issue delivered by the unwind of the pandemic. Because since then, it’s been really strong.
Now I think to Tim and team’s credit, I think they did a lot of work also to upgrade our capabilities, our predictive capabilities, the different data points that go into our modeling. So I think we are much better than we were then also. We also have a much bigger patient base than we did then, also which helps, and that will continue to grow and help more and more. I think we are — we try to be very prudent in how we book our nearing quarter. So as you’ve probably seen, we’ve reduced med cost the last, what, three or four quarters from prior periods as we kind of prudently book. And so again, I think that a number of things that we’ve done to improve. But I think the root cause issue, again, looking back knowing what we know today, was very much of a kind of a one-off behavior change in a very dramatic way by patients that has not been repeated, and I don’t expect it will happen again.
Operator
We have a follow-up from Sandy Draper from Guggenheim.
Sandy Draper
Could you just comment on — I know you said this year, operating cash flow is sort of aligning with EBITDA. Is that a good sort of long-term way to think about the model, or is it going to trend back one way or the other? That would be helpful to get thoughts on that.
Tim Cook
I think generally speaking, that is the right way of thinking about it. Again, give or take a little bit, right? But roughly speaking, we should approximate. I think if you look back historically speaking, you will see that trend, again, on an annual basis, and we’ll — we expect that going forward.
Operator
[Operator Instructions] We now turn to Jessica Tassan from Piper Sandler.
Jessica Tassan
Can you just describe what Oak Street’s role is during AEP and kind of what are your priorities during that time in terms of patient retention and patient recruitment?
Mike Pykosz
I think AEP is a very different period for Oak Street. And frankly, less important period for Oak Street than it would be for health plan. Because we’re adding patients throughout the year because they’re picking us as their primary care provider, and there’s no implications on the open enrollment there. We do see a little higher growth in the AEP period because people are being activated to think about health care decisions because of all the advertising and things happening in the Medicare Advantage front. Oftentimes, we’ll partner with and coordinate with insurance advisers who are signing people for plans who need primary care doctors. So again, there’s a little bit of a lift through the period, but it’s not the kind of this outlier period of growth, like it is for health plan [works year out]. And look, one of the things we do all year around, not just during AEP, but certainly during AEP, is we want to make sure that our patients are on the right plan for them and leveraging the benefits appropriately. And what we find is there’s a lot of supplemental benefits and formulary rules and things of that nature that are relatively complex, so we have a resource in all of our centers, we call a patient relations manager.
But essentially what the PRM, we call them, does is they help — along their many roles, they help our patients navigate all things insurance, right? And so making sure that our providers in the sense of formulary sort of patients, making sure that people who have a benefit around certain supplementals or certain activities are leveraging that if they’re interested, et cetera. And we find that, one, is most importantly a great benefit for our patients. But number two, if they’re using those things, it leads to better retention for the health plans as well as an ancillary benefit. So we do that all year round, but obviously, AEP has increased importance. And the last thing I’ll say on this is I think one of the advantages of being a multi-payer platform is patients, if there is a better plan offering, can switch plan offerings and stay with Oak Street Health. And so as the M&A market has been more and more competitive in the last couple of years, as there’s been more and more dollars flowing into marketing, we’ve been able to navigate that well in large part because of our true multi-payor nature.
Operator
This concludes our Q&A and today’s conference call. We’d like to thank you for your participation. You may now disconnect your lines.
