Just tell me when. Good to go? All right.
For good water?
Yeah.
Thanks so much. Appreciate it.
All right. Hello, everyone. My name is Craig Jones. I'm one of the health care analysts here at Bank of America. Today I have the pleasure of hosting Brandon Sim, CEO of Astrana Health. Brandon, why don't just to get started, can you just give a brief overview of kind of Astrana's businesses, maybe some of the key differentiators versus some of your competitors?
Yeah, of course. Thank you for having me here. Great conference, as always. Appreciate it, Craig.
Absolutely.
Astrana Health is a health care delivery company. We operate by partnering with physicians, by employing them where it makes sense for them, and really by creating well-managed, high-quality, and cost-contained health care delivery networks that we then enter into value-based arrangements with payers in order to monetize. What that means is downstream, we are responsible for creating primary care, specialty, and hospital networks that are really going to take better care of the patient, provide preventive care upfront, provide access to great care, and hopefully reduce some of the unnecessary costs that exist in our system today. We partner with over 12,000 physicians downstream today. That number is continuing to grow, both organically and inorganically, and we'll probably get into that a bit later. We serve around 1.1 million patients, members, in value-based arrangements.
What we mean by that is that we take financial accountability for these patients, both upside and downside. There are varying levels of risk depending on the contract that we're taking. Sometimes we're taking all of the risk associated with their outpatient and inpatient care. Sometimes we're just taking the outpatient. It will depend on the contract. We do that across all patient types, all lines of business, and in a payer-agnostic way. We're partnered with over 25 different payers. We take care of Medicare members, Medicare Advantage members, commercial and Medicaid members, and exchange members, really across the whole spectrum of the patient continuum. In the past, we've grown at a rapid pace. We are proud to continue scaling our business and remain profitable while doing so.
We just reported Q1, grew revenues at 53% year over year, continue to grow our profitability, and we are generating cash. We think we're in a strong position to weather some of the storms that have obviously been hitting the industry of late. I'm sure we'll get into some of the building blocks of that over the next half hour.
Absolutely. Yeah. Before we hit the topic of the day in Medicare, why don't we start with the topic of the day for Astrana, which would be Prospect Health. Large acquisition you made, I think, last November for $745 million. Why don't you just first give us a brief background on the business, strategic rationale, and thoughts around the transaction?
Sure, of course. Prospect Health is an entity, as Craig mentioned, that we announced we would be acquiring or have a definitive agreement to acquire in November of last year. We continue to expect that transaction to close sometime this summer in the next few months here. That transaction is for a scaled provider network that looks, frankly, a lot like ours in many aspects, with a few key differences where we think we can drive synergy. It is 14,000 physicians and providers in that network serving around 600,000 patients in value-based arrangements mostly throughout Southern California, with a smattering of members in Arizona, Texas, and Rhode Island. These members are like our members in a multi-payer, payer-agnostic setting. Over 20 health plans are prospects across Medicaid, Medicare Advantage, Medicare, commercial, and exchange. They also have varying levels of risk in their contracts like we do.
They're managed by Prospect's management services organization the same way that our members are managed by our MSO. Structurally, very, very similar to our business and in a very adjacent and complementary geography to where we operate today. Our headquarters are in Los Angeles, just east of downtown. Prospect's are down in Anaheim, or Orange, rather, 30 miles away near the Angel Stadium. It's very close by and, again, geographically very complementary. Interesting thing is we've known Prospect for a long time. Just like us, Prospect has been in operation for over 30 years in Southern California. As one of the largest non-health system provider networks in Southern California, the other ones probably being Optum that everyone knows and Heritage, which is a private company.
Really, among Optum, Heritage, Prospect, and ourselves, we make up a vast majority of the care delivery capabilities in Southern California. When Prospect's parent entity, which is a hospital organization, recently came upon financial struggles due to their sale lease-back transactions with Medical Properties Trust, similar to the Steward situation, if any of you are tracking that one, we thought we had a great opportunity to come in and, in a creative way, add to our footprint across Southern California and really fill in the coverage gap, so to speak, from San Francisco all the way down to the Mexican border in California. We can do that in a way that's accretive to our business. They generated $94 million of adjusted EBITDA in 2024, according to the audited financials, $1.2 billion of revenue.
We think that under our platform, we can continue to drive synergies, both cost and revenue synergies, in the business. We have conservatively guided to $12 million-$15 million of synergies in the first 12-24 months. That is all cost-related synergies. In reality, we think, frankly, that there is a lot of opportunity for additional synergies beyond that. We are excited. We are excited to close the deal. We know it is a big bite in terms of $745 million cash outlay. We have a fully funded TLA plus revolver, and so for a plus two and a quarter, partially thank you to the other side of the house here at B of A, in order to fund that transaction at fairly low cost in the 6% interest rate. We understand that it is going to be a big transaction that we will need to execute through.
We have a high degree of confidence. We've guided to 81 rather than the 94, even including extremely conservative guidance around trend and potential abrasion during the transaction integration problems. Not that we think there will be, but even conservatively, we think we'll be generating pro forma over $260 million of adjusted EBITDA for the year, converting into cash at around a 50% clip. We are excited about the deal. Continue to be expected to close in the next few months here, and we'll update guidance for the street once that happens.
OK, great. You've obviously done acquisitions before, but this one is fairly large. What do you view as sort of the top risk here from an integration perspective, and how do you kind of get investors comfortable around those risks?
Yeah. I mean, Craig, to your point, we've done acquisitions before. The year before this, we acquired something for $200 million, around a third of the size, 200,000 members. That was Community Family Care. In October as well, we acquired Collaborative Health Systems from Centene as the final divestiture of their provider assets for $37.5 million. We've done a bunch of transactions before. In each of these transactions, we've really built up a muscle memory and a process around, at least on the operational side, how to integrate and ensure that they're coming on our platform in a seamless way. One example here is that Centene asset. We closed on that deal in the beginning of October, right before we announced the Prospect deal. Now, just around six months later, six, seven months later, we are fully integrated.
We've cut out at least $10 million of SG&A costs from that business. The business was losing $25 million a year in 2024, which is why we got it for $37.5 million enterprise value, despite having $350 million-$400 million of revenue. So we got it for cheap because it was losing a lot of money. We've completely turned that around, and it's going to be a break-even business for us this year and profitable next year, partially from G&A cuts, partially from investments in the care model, and improvement in trend and MLR. It's the exact same playbook I think we're going to use with the prospect. It's cutting G&A upfront because of the automated technology platform we built. Everyone says it, but that's AI-enabled. That's my background personally. I've published papers in AI before.
We built out a system that automates a bunch of the claims, the prior auths, the care management, really making sure patients do not fall through the cracks. We think we can cut a bunch of SG&A first, ensure that we are in solid footing, and then continue to implement our care model from the clinical side to drive long-term MLR gains, quality gains, and ultimately help patients have better outcomes. I mean, to answer the question more specifically around risk, it is hard to see a lot of operational risks because of the platform and how it operates in a similar California model that we already have that we just integrated CFC under. I think the bigger risks, probably, if I had to say, would be around any abrasion of the provider network on integration into a new entity. Prospect has not generated the best headlines of late.
Now, it's a different entity. It's the hospitals. Still, that name, could there be a risk that providers see the headlines and get worried and maybe leave and try to go somewhere else to a competitor, maybe? Potentially. I mean, I think if you had to ask me about risks, that would be the risk. I think it goes the other way, too. I've been personally meeting, me and my team have been personally meeting with all of the large physician pods within Prospect. There's been a really good reception so far. They're really quite relieved that they don't have to be owned by a hospital entity anymore and drive all that the hospital entity cares about, which is driving admissions at the hospital. They're relieved to be able to operate with a physician-led, physician-centric company like ourselves.
I would argue that our competitors actually might have more risk in terms of churn, especially with headlines as recently as this morning. Some of our largest competitors, their physicians may be looking at greener pastures as well. What greener pasture than an entity that continues to grow, that continues to care about its physicians, and is not overcoding, and is doing things the right way for its patients. I do not know if that helps. I think there are a lot of risks, but on the flip side, also a lot of opportunities.
Yeah, absolutely. Yeah, tons of opportunity there. Maybe since you did bring it up, the bankruptcy proceedings that the rest of Prospect was going under, maybe there's anything you just want to clear up there to clarify how this is largely immune from all that. Maybe just to wrap up Prospect, investors' initial reaction wasn't that great to the deal, right? I think that's fair to say.
Say the least.
Say the least. OK. I guess maybe you've hit on this already a lot already, but what are sort of the maybe three key things that you think everyone's kind of missing around this potential opportunity that you think bringing these two businesses together can achieve?
Yeah, sure. Maybe I'll start there, and then we'll.
Sure.
Clearly, the response was not great. I understand. It's a big deal. Put on leverage to do it. It's an uncertain macro environment. I think what people are missing, and I think they get it. It's just not reflected yet in the valuation of the company. What is really that the Prospect entity has been a very stable and cash-flowing entity. The parts that we're buying, rather, have been stable and cash-flowing for a long period of time. They've been around for longer than we have, 37 years.
Wow.
This is not new to them. Their management team has been there for a long time. The CEO of Prospect, who we hope will come on board with us once the transaction closes, he was the CEO of Humana California. He's been there for many, many years. The CFO has been there over 10 years. It is a team that really understands the business they're running, and they've run it profitably for many years. It is not that we're going and taking on something that's not accretive and we need a bunch of things to go right. Even if we did not integrate them at all, which is not the plan, but even if we did not, they would continue running, and they would continue to be profitable and continue to be cash-flowing.
The second thing I think is really teasing apart the, and this is getting to your first question, teasing apart kind of the Prospect Medical Systems bankruptcy or the Chapter 11 proceedings and the Prospect Health transaction perimeter that we're buying. This is public information. We have orders. There will be orders from the bankruptcy court that will allow us to acquire the assets that we're acquiring in the transaction perimeter, free and clear of all liens. The hospital that we're buying, I know there's concern around that, is completely free of any sale lease-back liability, which is very different from the rest of the hospital portfolio. This one hospital, we will own not only the hospital, but the real estate under the hospital free and clear of all liens or liabilities. We've purchased a ton of reps and warranties insurance. We have a $45 million indemnity and purchase price escrow.
There are a lot of ways that we've protected ourselves when negotiating the deal to make sure that we're not going to be hit by any successor liabilities or any oddities in the system. We did a full coding review of the asset before we bought it from a risk adjustment perspective. We've really thought through all the ways that this could potentially go wrong. We spent over a year, frankly, diligencing the thing before we finally pulled the trigger. I think the second thing really is just the level of risk that people are ascribing to the business in the acquisition is probably higher than we think internally, especially because, again, they operate in the exact same California delegated model. They get to see the claims, prior auths, all of that. It is the exact same system that we run in today that's led to success.
I think the third thing people are underestimating is the upside potential. It's great already, nine times unsynergized, tons of synergies in there. The upside potential is that really, if you think about a cell phone carrier or something, they have all these maps that they show in the Super Bowl of their coverage across the country or whatever, and they're filling in all these dots. Right now, our coverage map in California is missing two big counties, Orange County and San Diego . What that means is that payers who are looking to use our network are sometimes a little leery because they know that they can't rely on us for the entire state of California. They know that they have to use some of our competitors, so they can't avoid burning that bridge. They have to fill in that gap in Orange County and San Diego.
Now that we're providing a full end-to-end network coverage across where 90% of the population of California lives, from San Francisco down to the Mexican border, we really present a viable alternative that's cheaper, higher quality, and better for the patients that payers can use and partner with. We're really excited about what that means going forward, not just from the 81 that we're going to get and the synergies and all that, but the potential to be a top player in the state of California and beyond.
Absolutely. Yeah. Thanks for going through all that with Prospect. That was super helpful. Maybe now we switch to the news of this morning, Medicare. We had United come out, say it's getting worse and worse, Medicare Advantage. Medicare is about 60% of your business. Why don't you, first of all, if you can clarify what you're seeing so far in 2Q, is it really getting worse like United's seeing? Maybe what you're seeing in 2025, what's implied in your guidance for 2025? Just where do you think the total Medicare market in general, Medicare Advantage market in general is right now?
Sure. Certainly interesting comments from this morning. In our business, that's not what we're seeing, frankly. We guided to a 4.5% trend for the year. Last year, we came in at just over 5% for the year of 2024. We said that's what we would do, and we came in at that trend. This year, we said 4.5% through one quarter and having visibility into utilization for Q2 here because of our delegated model where we're processing auths and paying claims. We do have visibility into what, in a more real-time way versus other risk-bearing organizations, where utilization is coming in. We're just not seeing that acceleration of trend in Medicare Advantage. I think even the comments were outside of Medicare Advantage as well, other lines of business, that's not consistent with what we're seeing.
I do not want to conjecture, but I would say that there are a lot of other headwinds for Medicare Advantage organizations that are coming to bear this year and next year, and that is in the form of risk adjustment reform in v28. I would just put it out there that our risk scores have always been appropriately documented. We are just over 1.0 or 1.02. As I mentioned earlier, we did a full coding review of Prospect prior to acquiring them or signing the deal to acquire them. We do not think we are at risk. In fact, from last year to this year and from, sorry, from last year to the year before, the first one-third of the v28 phase, our RAF score has actually increased across the board. We did not have a headwind at all, and we expect that to continue this year.
We haven't gotten the final mid-year numbers yet. While other organizations who maybe have coded more generously will face a steep headwind that I think could be part of the financial outlook for some of these organizations.
Yeah, absolutely. I think that is an important point, right, where some of the things like risk adjustment scores and stuff where you have really been able to outperform your peers in the medical cost trend. Why do we not move to 2026, right? We got the final rate notice recently. Seemed to be good news for everyone. Why do you not talk about how you kind of, I think you sort of saw that coming to a degree. When you talk about sort of how you plan strategically for that and how impactful do you think it could be for you going forward?
Yeah, absolutely. The rate notice is, in theory, a function of historical claims utilization. In theory, folks could have seen part of what was coming. There are always adjustments at the end from an administration perspective. The current rate for 2025, and especially for 2024, uses periods of past utilization looking back as a weighted kind of average, looking at times of very low utilization during COVID. Now that we are moving on to 2026 and 2027, we are using in our look-back window years of high utilization like 2023 and 2024, which obviously is going to raise the trend and make it look like the base rate increase for MA should be higher. That is what we thought was going to happen, and we are glad that it ended up happening.
Part of what we're doing, what we did to prepare for that was, one, we didn't take a step back from risk in MA the way that a lot of our peers did. We were confident in our care model. Sure, it might not have been the most profitable thing in the world during the last couple of years where there was a 4% or 5% trend, but we continue to make money in those contracts. We continue to move towards full risk and actively recruit and not leave our payers hanging on those contracts. Now imagine if you're a payer and you're facing STARS challenges, v28 challenges, and utilization challenges, triple whammy to the point of, quote, "This is the most challenging operating environment that any company has ever faced," I think was the quote from this morning.
Are you happy if your value-based care partners that you've reinsured your risk to are terminating your contracts at this time of need for yourself? No, that's like your insurer saying they're not going to insure your house when they see the fire coming 10 miles down. That's crazy. When times are better, you're going to go back to those people that left you in the lurch at the time that you most needed them in your most challenging operating environment of all time for any company? I think we know the answer to that question.
Those who have stayed faithful, who have stayed loyal to our payers, who have supported them and continue to grow and help them stabilize their OLR, help them raise their STAR scores, help them improve their quality and their patient outcomes, even in tough times, we think that's the right strategy going forward because payers are our partners at the end of the day. We have to make sure that they're winning for us to keep getting members. We think we've held a bar in with the bargaining. It is that. It is the acquisitions of heavily senior lines of books of business, CHS, for example, $350 million-$400 million, $95 million in the first quarter, all almost entirely senior business. The Prospect business, Proforma, would be 60% of the Proforma revenue, which would be $3.8 billion at the midpoint. 60% of that is Medicare-related revenue.
We think we've made some bets that give us high beta, so to speak, to Medicare Advantage. We think we haven't sized that entirely because it remains to be seen how the bids shake out and where kind of plans will come in. We do anticipate a very material tailwind from the MA rate.
That's great, Caller. Thanks for that. Maybe we use this as a sort of transition into Medicare and Medicaid. Coming out of Washington, there's stuff on Medicaid right now, what's going to get cut, what's not going to get cut, right? Any color you can provide there on Medicare or Medicaid, what you're hearing, it seems like it's changing every day, but whatever you got, I'm sure people appreciate it.
Sure. Yeah, I mean, Medicaid is, we're looking forward to getting through to a conclusion there at the end of the budget reconciliation process. We're hoping by the end of summer, there will be clarity there and we can kind of move past some of these uncertainties, I guess, in the market. What we're hearing latest, which I'm sure you've all heard as well, is that broadly, Medicaid, I think it's a bipartisan effort to not exit, to not touch it too much because of how important it is to millions of Americans across the country. I agree with that. I think a lot of people really do rely on Medicaid. I think I saw a stat. Over half the babies that are born in America are born on Medicaid. It is really an important safety net.
I think this is a non-political statement just for people who need help in our country. I think Republicans are seeing that and Democrats are seeing that, and it's going to be a pretty bipartisan effort. Now, I think around the edges, are there opportunities to find fraud, waste and abuse, and inefficiencies and waste in the Medicaid program? Absolutely. I think there's going to be a bit of that that gets cut down. I think people are talking about 90% FMAP down to 80% for states that have undocumented immigrants. They're talking about potential cuts in or potential increased eligibility checks, work requirements, things of that nature. I think the way that I would size it for us is $2.6 billion of revenue at the midpoint. 28% of the revenue is from Medicaid. You're talking about $700 million or so of revenue from Medicaid.
That's our lowest margin business. Still profitable, but lowest margin. So we're running a $30-$40 million adjusted EBITDA from that book of business. If there are eligibility requirements that are more stringent, if there are slight cuts to eligibility based on California and where our budget sits, I could see worst case 20%-30% of those members no longer being eligible. That would be a 20%-30% haircut to that 750, which would be not that material, call it $200 million-ish of low $200 millions of revenue hit and corresponding to a $10-$15 million maybe tops EBITDA hit. That's kind of what would look like in kind of the worst case. All in all, I mean, something I think we can weather through, especially with the tailwinds coming from MA next year, but we will be eyes and ears peeled for any updates on Medicaid.
Okay. Maybe to follow up on Medicaid utilization, right? That was a big issue last year and then this year again when you guided. It was high single-digit utilization versus reimbursement rate is somewhere significantly below that, right? As you think about, first of all, I guess we're getting close to halfway through 2025. Maybe you can hit on where that is trending from a utilization standpoint. As you look out further, right, as you renegotiate some of these contracts, which are multi-year, right? I mean, how much of this do you think you can mitigate with recontracting going into 2026? What % is going to take longer than that? Maybe with those renegotiations, any guide rails you can give us around potential tailwinds to larger EBITDA and things like that would be great.
Yeah. I think at the moment, given the uncertainty in Medicaid, we are not expecting anything incrementally better on Medicaid. Trend, to answer your question, we're not giving kind of per quarter, per line of business trend guidance, but 4.5% was the guide for the year. Medicaid was going to come in a few percentage points above that, Medicare and commercial below. We are continuing to see that. We obviously saw that in Q1 and continue to see that moderate in Q2. Look, it's still high, right? It's still higher than I would like it to be in the steady state, but it's something that's controllable that is incorporated into our guidance. We continue to be confident in the $170-$190 of adjusted EBITDA guidance that we gave for the business for 2025 at the beginning of the year.
Revenue guidance, adjusted EBITDA guidance, continue to be confident in that number, not being retracted or anything. Very confident in those numbers. We are going to continue to work with our planned partners to figure out something that makes sense on Medicaid. I do not have, it is hard for me to provide specifics given we do not know if FMAP funding is going to go away or where the budget in California is going to land ultimately with some of the Prop 35 dynamics. All we can say now is that we have incorporated that into our trend and we do not believe there to be incremental net negative items to adjust EBITDA and that we are confident in the guidance.
Okay. Got it. Fair enough. Maybe just quickly on the last part of the business, the commercial side, it's about 10%. Anything you want to call out in terms of utilization, any other dynamics there that we should be aware of? Just to clarify, I don't think this is a business you're interested in going full risk on, right? Just want to quickly explain the thought process there.
Yeah. Commercial continues, commercial trend in our risk-bearing commercial business continues to be controlled. These are mostly HMO books of businesses and commercial. We do have some kind of ACO-like BPO business and some self-insured type business, but the vast majority of it is quite controlled. We continue to grow out slowly, but continue to grow out our partnership with Anthem Blue Cross, which is Elevance in California, to build co-branded clinics, particularly that are targeted towards commercial and exchange members and ensuring that they have access to high-quality primary care. That is continuing. We opened our second clinic in Orange County just a couple of months ago. Broadly, the commercial book is a smaller part of the business, but quite stable. We're very happy about that.
In terms of full risk regression, we have not historically done that because we did not believe we had the scale to negotiate appropriately with hospitals where those costs can really get out of control on a commercial book of business. Interestingly, Prospect has dabbled in commercial full risk and has done pretty well there. Potentially as we move forward and we figure out the numbers and ensure that we are taking prudent risks, that could change in the future.
Okay. That's good to know. All right. As we got a few minutes left here, it's like toward 2027, right? $350 million EBITDA as the guide. First, why don't you just, can you walk us through the math and how about you give us any insights into visibility you currently have around reaching that number.
Yeah. The 350 guide is pretty conservative. It included some thoughts we had around what the 2026 rate notice would be. Obviously, we put that out before the rate notice came out. It includes the $81 million conservative number from Prospect. It includes $12-$15 million of synergies from the business. It assumes kind of high single-digit EBITDA growth in the combined businesses blended. Got a couple of puts and takes in there with some of the G&A investments and new market progression, but all of which is on target. CHS, as I mentioned, is going to be break-even sometime this year, profitable next year, and then even more profitable going into 2027. It does not require that much. You do not have to believe too much to get to the 350 in 2027.
It's funny because people ask me all the time, like, "Hey, why would you only assume high single-digit growth? Wouldn't you be higher than that?" The answer is, yes, you're right, but you don't have to believe any of that. Even if you discount all the things that I say on the stage, you can still believe in the 350 because you don't need to believe that much to get to 350. Our detailed bridge is somewhere, I think, in our investor deck online. We published new slides today if you guys want to look at that. We remain confident in that 350 guide. We remain confident in the 170-190 guide for the year. We just really are looking forward to executing against it.
Okay. All right. So last question. We're thinking bigger picture now. As China has changed tremendously over the last, say, two plus years, as we look out two plus three plus years from now, right? What are we going to look back and say, "Wow, that was like, what's going to change the most from now to then versus I always look back from here to two or three years ago?
Yeah. I mean, it's just increased the sophistication and organization around how we implement the care model. The bones of the care model have always been good dating back to 25, 30 years ago. But doing that in a scalable way that allows us to more quickly get from the negative book of business when you first take on something to break even to profitable, doing that repeatedly across new markets and proving to all of you, I suppose, that that's doable and that it's possible to actually run a value-based care company profitably is hopefully what people will be saying about us in two, three years. I mean, if I can conclude with some quick remarks, I'm out of time. I mean, there really isn't, I know this is not a metric used for healthcare services companies really, but I mean, take a look at rule of 40.
We're like a rule of 55, whatever the number is, company. There really isn't another company in healthcare, in all of healthcare services that can point to a 2027 number and sit on the stage and be confident about that number, a number that would make us trade in the mid single digits and have continued to grow at a 29% CAGR over the last six years in a row. I mean, it's something that is tremendous because I think our model is really resonating with payers and with patients. We look forward to continuing to have that happen with Prospect closing, but I'm just not sure where else you would find something like this that's growing at that speed that remains up into the right profitability.
I agree. All right. I think that's all the time we have, but thanks again, Brandon, for joining us.
Thanks so much, Craig.