Good day, and thank you for standing by, and welcome to the InnovAge Fiscal Q3 of 2022 Earnings Conference Call. At this time, all participants are on a listen only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Ryan Kubota, Director of Investor Relations. You may begin.
Thank you, operator. Good afternoon, and thank you all for joining InnovAge's fiscal 2022 Q3 earnings call. With me today is Patrick Blair, President and CEO, and Barb Gutierrez, CFO. Dr. Melissa Welch, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market close, we issued a press release containing detailed information on our quarterly results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 10, 2022, and have not been updated subsequent to this call. During this call, we'll refer to certain non-GAAP measures.
A reconciliation of these measures to the most directly comparable GAAP measures can be found in our Q3 of 2022 press release, which is posted on the investor relations section of our website. We will also be making forward-looking statements, including statements related to our remediation measures, including scaling our capabilities as a provider, expanding our payer capabilities, and strengthening our enterprise functions, future growth prospects, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations.
We advise listeners to review the risk factors discussed in our Form 10-K for fiscal year 2021 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscalQ3 of 2022. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?
Good morning. Thank you, Ryan, and thank you all for joining us today. Before jumping in, I'd like to again express my gratitude to our InnovAge employees who put our participants at the core of what we do every day and for their selfless contributions during a difficult time. Our federal and state partners for their partnership and support as we work through the audits, and to our shareholders for their continued interest in the company. There's a lot to cover today, so our prepared remarks will be a bit longer than usual. It's a challenging period for InnovAge, and this quarter's results reflect the significant transformation we're undertaking. I'm confident we'll manage our situation the right way, and we're optimistic about the company's future, both in terms of the markets we serve and the solutions we offer.
While the current sanctions represent a major challenge, I'm genuinely excited about the market opportunity, the foothold we have in important markets, our incredible PACE clinical expertise, and the amazing employees who are proud to work at InnovAge. I've been encouraged by our progress over the last 90 days, and while it's certainly requiring a lot from them, it's clear that our employees have the motivation and ability to overcome the challenges we're facing. Their efforts are frankly inspiring, and the improvements, while still early, are becoming visible. As you know, we're currently under sanction in our Sacramento Center, as well as our 6 centers in the state of Colorado. As a result of these sanctions, we're currently unable to grow our census in these markets.
We're following the lead of CMS and state government partners and working with them to ensure they're satisfied completely with the work we're doing to address the audit findings. The regulators determine the timeline for the audit process, and we're doing everything we can to satisfy the requirements to lift the sanctions. I will provide a detailed overview for each of our markets, but suffice it to say, these learnings through a difficult period will make this organization a more disciplined and compliant organization in the long term. Today's discussion is going to focus on near term operational execution and mid to long-term capability development. These are the core drivers and horizons necessary to comprehensively remediate the deficiencies identified in our recent audits. Equally important, they are the foundational building blocks to ensure we're well positioned for scalable, sustainable, long-term growth.
As a leadership team and organization, and with the full commitment of our board, we're defining success and holding ourselves accountable across both horizons. My objective today is to delineate and to put into context the full portfolio of actions we're taking. On our last call, I'd been in the CEO seat for 30 days. It's now been a little over 4 months. I'm going to begin with some current reflections and follow that with updates on the critical work underway and the progress to date along 3 dimensions of remediation and transformation, which encompasses what we're calling One InnovAge, the status in each of our markets with our regulators, perspectives on the quarter, and concluding thoughts. I'll then turn it over to Barb to provide a detailed financial overview before we open it up for questions.
To help bridge from our last call, I'd like to anchor back to some observations shared in February as I was first immersing myself in the audit results and business operations. I committed then that my immediate highest priority was to address the audit findings and to restore our regulators' trust in InnovAge. Now, with an additional 90 days under my belt, I'm in a much better position to provide additional granularity on what must change. I've spoken with employees, government partners, and reached out via personalized letter to all 6,800 participants, asking them for feedback on how we're doing. This has led to not only a more detailed understanding of identified audit deficiencies and associated root causes, but also the specific transformational actions required to support the lifting of sanctions. The PACE program is unique, and the core program design requires both provider and payer competencies to participate.
We're assuming both full underwriting risk for our participants and managing the delivery of care for a very high acuity population. I want to distinguish between the provider and payer attributes as the capabilities to be best in class differ. In the case of InnovAge, each dimension needs to be robust and seamlessly orchestrated to be successful at a national scale. On our last call, I communicated my belief that InnovAge possesses a sturdy foundation and tremendous potential. I still believe this, but now with more time in the business, it's also clear that to enable a consistent, scalable platform, our capabilities as a provider and a payer respectively require enhancements and need to evolve. I also believe that payer capability enhancements represent incremental opportunity, and I will share more detail on our plans to execute against this dimension. Now for the critical work underway.
The portfolio of remediation and transformation work, what we're calling 1 InnovAge, has three key dimensions, and I'll use these as a framework to provide progress updates on this and future calls. They include, 1st, creating operational excellence as a provider by formalizing a repeatable blueprint to deliver personalized, integrated, yet distributed care in our centers virtually and in the home. 2nd, expanding our payer capabilities to ensure we're effectively managing the total cost and quality of care, and that our revenue accurately reflects the acuity of the populations we serve. 3rd, strengthening enterprise functions to enable our centers to reach their full potential through robust talent management, data and analytics, sales and marketing, and government relations, underpinned by a uniform way of working and success metrics.
Let me walk through each of these dimensions in more detail to give you a flavor of our key areas of focus and where we are currently. 1st, operational excellence as a provider. First and foremost, our primary focus continues to be addressing the deficiencies identified in recent audits in as rapid a timeline as possible and returning to growth in the mid to long term. The audit results have found gaps in our performance when compared against regulatory and our own expectations. In February, I categorized the nature of our compliance deficiencies into two broad buckets, care coordination and care documentation. Over the past 90 days, my understanding of each identified deficiency, their root causes, and the critical capabilities needed to become compliant have come into a much sharper focus.
To elaborate, I've established eight initiatives that are intended to support the remediation of audit identified deficiencies and earn back the trust of all stakeholders. 1, filling critical personnel gaps at each of the centers. It all begins here. 2, standardizing the process of our interdisciplinary care teams who plan and coordinate and deliver care. 3, strengthening our home care network and reliability. 4, improving timeliness of scheduling and coordinating care with providers outside the centers. 5, improving our telephonic channel response times and closing critical communication loops. 6, improving the efficiency and reliability of transportation for our participants. 7, standardizing our wound care program across the enterprise. And 8, reducing documentation outside of the EMR. Importantly, we've been proactive in the broad implementation of these consistent operational processes at each of our centers to ensure identified deficiencies are resolved and do not recur anywhere in our portfolio.
We're making solid progress on all fronts and expect to complete our short-term objectives for these initiatives by calendar year-end. 2nd, dimension 2 is expanding our payer capabilities. As mentioned earlier, PACE is a unique value-based risk-bearing model that requires excellence at both provider and payer competencies to serve this population at scale. Historically, PACE programs have primarily focused on care delivery side of the equation, and the same is true at InnovAge. This creates an opportunity to better manage total cost of care and ensure we receive appropriate payment for services provided. The core payer capabilities I'm describing include effectively managing provider networks and contracting to optimize unit costs, leveraging evidence-based guidelines, and rigorously optimizing quality, value, and utilization of services, ensuring we're paying external providers appropriately for billed procedures, and accurately matching risk-based payments with the acuity level of our participants, to name a few.
To be clear, these capabilities exist within InnovAge today, but the scorecard is mixed. We compare well to other PACE programs on utilization measures like ER visits, admits, conversion of inpatient days to observation days, and we're proud of this. We're also looking to benchmark ourselves on quality, outcomes, and cost against all other best-in-class value-based providers serving frail senior populations on a fully capitated basis. Given its importance, we're actively starting down the path of building a comprehensive payer capability roadmap and an actionable portfolio of quick hit and longer-term initiatives with help from a specialized consulting partner. This outside-in perspective is important, and it will take time to size, implement, and for any benefits to fully materialize in our P&L.
We'll provide further updates on future calls as we continue to get our arms around the range of incremental value at stake and what's needed to begin to capture it. 3, building the right enabling enterprise capabilities to empower the centers. Lasting gains from remediation and transformation efforts will hinge on the development of a handful of critical enabling capabilities at the enterprise level, starting with talent. Focusing on talent will be core to everything we do as our success starts and ends with having the best people in every job. Therefore, we're building a robust talent engine to attract, retain, develop, and recognize our people. To that end, we've made progress this quarter in adding key executives to our team to help broaden and deepen our leadership across several important areas. Enterprise-wide, we've added approximately 100 net new FTEs despite the tight labor market for healthcare talent.
As is also natural at times of major change, we have had a few leaders who have left our team or will be leaving imminently. As referenced in the press release, Dr. Melissa Welch, InnovAge's Chief Medical Officer, has announced her intent to pursue opportunities outside the organization. To ensure a smooth transition, Dr. Welch has agreed to remain in her current role through mid-June. Dr. Anne Wells, our current Chief Medical Officer for Population Health and Quality, will assume the role of Interim CMO upon Melissa's departure while the company completes its external and internal search for a permanent replacement. I want to personally thank Melissa for her numerous contributions to the organization, especially during COVID, and meaningful impact on our participants. I wish her the very best in her future endeavors and would also like to thank Anne for assuming this critically important interim role. Next, technology.
With people as our true north, our initial focus is on technology to make our people more productive and efficient. Right now, we're focused on the basics, reducing fragmentation across systems and tools, infusing more data and insights into decision-making, and automating manual tasks. Marketing and enrollment. Once the audit-identified deficiencies have been fully remediated and our operational processes are all in place at all centers, it's imperative to our mission to continue to serve more PACE-eligible participants. I'm confident our transformative efforts on this front will position us well to increase our center-level organic growth rates in a post-sanction environment. Government and public affairs. I've spent considerable time engaging with our regulatory partners to ensure they have full access to me, have regular opportunities to provide input and direction, and can readily observe the results of the changes we're making.
We recognize that some of our state partners were disappointed in us, and it's our job to restore their trust and confidence. We're doing this through a commitment to transparency, responsiveness, and accountability, and I'm highly encouraged by the collaboration and positive feedback from CMS and our state partners. Culture, communication, and organizational alignment. Chief among building an aligned and engaged workforce is cultivating the One InnovAge mindset and organizational culture, providing regular, transparent, and inspiring employee communications, establishing easy-to-understand organizational priority pillars, and connecting everything to a balanced scorecard to measure collective success as an organization. Cost structure. Lastly, as you would expect, we've identified opportunities to better align our cost structure to support the self-funding, where possible, of new investments, investing more in field-based functions and running more efficiently in some corporate areas, for example.
We're looking very closely at non-center-level cost, non-labor and overhead cost, procurement contracts, and capital assets to ensure we're operating at optimum efficiency. We believe there is opportunity, and every bucket is under scrutiny. To this end, we've already begun to streamline our teams and reporting structures, creating clear lines of accountability across the P&L, which we expect will result in faster decision-making, greater focus, accountability, and operating together as one InnovAge. I'll now provide a brief regulatory status by market. In Sacramento, we continue to execute against the corrective action plan that was accepted in January. Since February, we've progressed significantly in our performance against the key criteria that CMS and DHCS will use to measure our progress against the audit findings. In Colorado, we're pleased to share that CMS accepted our corrective action plan in late April.
We're responding to the state of Colorado's remaining questions on our submitted CAP, and we believe that our plan will be soon accepted. If approved, the activities are likely to follow a similar timeline to that of Sacramento, which began 3 months prior. In New Mexico, we received formal feedback from CMS in March that based on the results of the audit, which are consistent with those of Sacramento and Colorado, we have been referred to enforcement. We're currently awaiting feedback from CMS on next steps. In San Bernardino, we received an audit request from CMS and DHCS in February and received preliminary findings in mid-April. The high level findings are consistent with the deficiencies cited in Sacramento, Colorado, and New Mexico, and we're working with both agencies on the specific timing of a corrective action plan. At this time, our Pennsylvania and Virginia centers have not received requests for audits.
However, we are proactively enacting enhanced compliance ahead of any formal request. In Florida, we've committed to CMS and AHCA that we'll proactively pause the remaining steps in the expansion process to allow us to focus exclusively on resolving our active audit issues and cannot yet determine if a launch in fiscal year 2023 remains viable. We're still not able to estimate when existing or forthcoming sanctions will be lifted or the timing of future audits in Pennsylvania and Virginia. Our regulators will determine the timing of audits and sanction release once we've met all the criteria. As mentioned earlier, we're in regular communication with our agency partners around the status of existing audits and how best to collaborate with respect to our other centers. In the meantime, we plan to focus on proactively remediating deficiencies across our entire portfolio.
With that, I'll transition to a review of the Q3 business results and drivers. We reported revenue of $177.4 million, which represents a sequential increase of 1.1% compared to last quarter. We ended the quarter serving approximately 6,800 participants, which represents a sequential decline of 3.5% compared to last quarter. We also reported a center level contribution margin of $28 million and a corresponding center level contribution margin ratio of 15.8%, which represents a decrease of 32% sequentially when compared to Q2 fiscal year 2022 center level contribution margin of $41.4 million. We've spent the last month analyzing the attribution of these results, and I will summarize the core drivers as net census decline resulting from the sanctions.
Elevated external medical expenses, which were primarily driven by the lingering impacts of the Omicron variant. Specifically, Omicron increased the utilization and unit cost of inpatient days and ER visits, and non-community respite stays in skilled nursing and assisted living facilities relative to historical averages. We are also seeing the impacts of higher acuity. Given the frail nature of our population, average acuity rises with the passage of time. The risk pool of our population has become more acute as we have not replenished our population mix with newer, lower acuity participants. Higher general and administrative expenses as the result of investments we're making on the provider side to accelerate the remediation of the identified audit deficiencies and one-time costs associated with 3rd parties and restructuring. These results are disappointing and frankly below our expectations. As a leadership team, we understand that we must do better.
We are set up to benefit from scale, and this will be a great attribute for InnovAge in the future. However, performance this quarter highlights the financial impact of not growing our participant base, coupled with elevated direct and indirect costs that are largely attributable to COVID. Given what we've observed in the quarter along with larger initiatives in flight, I wanted to spend a minute on our margin profile. In the near term, we are making investments across the eight provider initiatives referenced earlier to strengthen the platform as rapidly as possible to ensure our centers have the people and tools needed to be compliant and successful. Somewhat offsetting these additional expenses in the near term will be the efforts across our G&A reductions.
As transparency is my ongoing commitment to you, I want to acknowledge that I expect there to be net margin compression in the near term until we close critical gaps and strengthen the foundation. What I can say is that the company is putting in place strong SG&A controls and the discipline to leverage our fixed cost base. It remains too early to forecast exactly how these will net out in the long term, particularly since we have not yet quantified the potential long-term impact of the payer initiatives. We will continue to hold ourselves accountable to an attractive long-term margin profile. I began the call noting that our priorities encompass both near term operational execution and mid to long-term capability development.
To summarize, job one in my commitment to our participants, employees, government partners, and shareholders continues to be doing everything necessary to be released from sanctions and to avoid future sanctions by proactively fortifying our foundational operational processes on an organization-wide basis. This work is largely about becoming a better provider, and we're making measurable progress on this objective. 2nd, the opportunities to manage the total cost of care by becoming a more sophisticated payer will be a mid to long-term objective. Further, as an additional part of this horizon, we're committed to building the tools, technology, and cultural elements needed for a highly engaged workforce. While our confidence increases by the day, it's important to acknowledge that we have a long way to go. As I said before, with the right leadership, focus, execution, and ownership and accountability, we will build a stronger InnovAge.
I've been fortunate to have been associated with organizations that have successfully navigated periods like this, and the businesses emerge stronger. There's nothing more important than ensuring we are consistently delivering outstanding care to our participants. What's more, I believe an unwavering focus on people, service, and quality will lead us to the performance we aspire to and earn us the right to serve more deserving PACE participants across the country. Again, I want to sincerely thank you, our regulatory partners and our employees, for your support. With that, I'll hand it over to Barb.
Thank you, Patrick. I will provide some highlights from our Q3 fiscal year 2022 performance. Given the impact of Omicron during the period, in some cases, I will refer to sequential comparison to our Q2 of fiscal 2022 in order to provide a more meaningful view of our performance. As of March 31, 2022, we served approximately 6,800 participants across 18 centers. Compared to the prior year period, this represents an ending census increase of 2.1%. Compared to the Q2 of fiscal year 2022, this is a decrease of 3.5%. We reported approximately 20,630 member months for the Q3 , a 3.4% increase over the prior year and a decrease of 2.6% over the Q2 of fiscal 2022.
Sequentially, the enrollment freeze in Colorado had the greatest impact on member months and census in the Q3 . Additionally, as we indicated in our Q2 remarks, towards the end of the Q2 and continuing into the Q3, we experienced an increase in total deaths. While not uncommon during the winter months, total deaths, coupled with added enrollment growth pressure as a result of the Omicron surge, also impacted our census growth. The Omicron surge affected our ability to interact directly with potential new participants and caused delays and lengthening of the enrollment process. Revenue in the Q3 of fiscal year 2022 increased to $177.4 million, or approximately 13.5% compared to the Q3 of fiscal year 2021.
Year-over-year growth drivers include an increase in census, the calendar year increase in Medicare rates effective January 1st, 2022, and an increase in Medicaid rates, which include temporary rate increases from the American Rescue Plan Act, or ARPA, in Virginia and Colorado. Specific to Colorado, we recorded a true-up of ARPA funds for the H1 of fiscal year 2022 in the Q3 , and we are still in discussions with other states regarding further ARPA rate increases. As we mentioned last quarter, we received a mid-single-digit rate decrease in our California Medicaid rate effective January 1, 2022. The decrease is the result of California's experience-based rate setting methodology and the inclusion of our calendar year 2020 experience, which is understated due to the shutdowns during the pandemic.
While we cannot predict what our rates will be next year, we have encountered higher utilization in calendar year 2021 as our centers reopened, which will be factored into the rate setting methodology for calendar year 2023. External provider costs in the Q3 were $103.3 million, a 37% increase compared to the Q3 of fiscal year 2021. While some of this variance is due to census growth, the main drivers of the increase are, 1, an increase in inpatient and medical respite utilization and acuity as a result of the Omicron surge, 2, increased housing utilization, and 3, increased housing rates as mandated by certain states, including an ARPA-funded public policy adjustment in Colorado that increased assisted living rates by more than 30% effective January 1st, 2022.
This assisted living rate increase in Colorado was not offset by a direct increase to our reimbursement rates. Additionally, while outpatient and specialist utilization has leveled off, utilization was higher compared to the prior year as a result of the pent-up demand of healthcare services that were delayed during the pandemic. Inpatient utilization has improved in the back half of the quarter following the Omicron surge. However, the number of and cost per COVID admit has increased year-over-year. Additionally, participants that have recovered from COVID have a higher acuity due to the inherent frailty of our population. External provider costs in the Q3 of fiscal 2022 increased by 13.4% compared to the Q2 .
The sequential quarter increase is driven by the Omicron surge and its impact on inpatient and medical respite utilization and costs and the increase in Colorado assisted living facility rates effective January 1st, 2022. We are in discussions with the state of Colorado regarding fiscal year 2023 rates. Our cost of care, excluding depreciation and amortization, was $46.1 million for the Q3 , a 16.5% increase over the Q3 of fiscal year 2021, driven by an increase in census and an increase in the overall cost per participant. The 12.7% per member per month increase is primarily due to, 1, higher wage rates associated with a competitive labor market. 2, additional labor costs associated with ongoing audit remediation and compliance. 3, greater operational costs due to the reopening of our centers that were closed during the pandemic.
4, pre-opening losses associated with de novo locations. Cost of care increased by 7.4% over the Q2 of fiscal 2022, primarily due to additional labor costs associated with ongoing audit remediation and compliance. One-time costs of approximately $400,000 associated with organizational redesign, increased headcount as we make significant progress in filling vacancies, and costs associated with the annual reset of employee benefits and taxes. Center level contribution margin, which we define as total revenue less external provider costs and costs of care, excluding depreciation and amortization, was $28.0 million for the Q3 , compared to $41.4 million in the Q3 of fiscal 2021 and $41.4 million in the previous quarter of fiscal 2022.
As a percentage of revenue, center level contribution margin for the quarter was 15.8%, compared to 26.5% in the Q3 of fiscal 2021 and 23.6% in the previous quarter of fiscal 2022. The primary drivers of the year-over-year decline in center level contribution margin as a percent of revenue are, 1, the impact of the Omicron surge on inpatient and medical respite utilization and cost, 2, increased housing utilization, 3, state-mandated housing rate increases, and 4, medical cost normalization. We also experienced an increase in cost of care due to wage pressures and additional staffing related to compliance and remediation efforts and other occupancy-related expenses.
Sales and marketing expense for the Q3 was $6.1 million, an increase of approximately $600 thousand compared to the Q3 of fiscal 2021, and was primarily due to increased headcount over the prior year, coupled with one-time costs related to organizational realignment, partially offset by a reduction in marketing spend associated with the ongoing enrollment sanctions. Sales and marketing expense decreased sequentially from the Q2 of fiscal year 2022 by approximately $500 thousand. This decline was primarily due to a reduction in marketing spend associated with the ongoing enrollment sanctions, partially offset by one-time costs related to organizational realignment. Corporate general and administrative expense for the Q3 was $24.7 million, an increase of $6.1 million compared to the Q3 of fiscal 2021.
The increase was primarily due to an increase in headcount, increased costs associated with being a publicly traded company, and 1-time compliance-related costs and costs associated with organizational realignment of approximately $1.4 million. Net loss for the Q3 was $3.2 million compared to a net loss of $10.9 million in the Q3 of fiscal 2021. We reported a net loss per share for the fiscal Q3 of -$0.02 on both a basic and diluted basis. Our average fully diluted share count was 135,516,608 shares for the Q3 .
Adjusted EBITDA, which we calculate by adding interest, taxes, depreciation, and amortization, one-time adjustments for transaction and offering-related costs, and other non-recurring or exceptional costs to net income, was $1.9 million for the Q3 , compared to $20.3 million in the Q3 of fiscal year 2021 and $14.8 million in the previous quarter of fiscal year 2022. Our adjusted EBITDA margin was 1.1% for the Q3 , compared to 13.0% for the Q3 of fiscal year 2021 and 8.4% from the Q2 of fiscal year 2022.
The quarter-over-quarter change in adjusted EBITDA and adjusted EBITDA margin is primarily a function of increased external provider costs and increased cost of care, offset by reduced marketing spend and lower corporate general and administrative expense as a result of one-time costs associated with leadership changes in the Q2 . We do not add back any losses incurred in connection with our de novo centers in the calculation of adjusted EBITDA. De novo center losses, which we define as net losses related to pre-opening and startup ramp through the first 24 months of de novo operations, were $1.0 million for the Q3 . This includes expenses for centers in Downey, California, Louisville, Kentucky, and our Tampa and Orlando centers in Florida.
Per Patrick's remarks, with respect to Florida, we have committed to CMS and the Agency for Health Care Administration, or AHCA, that we will proactively pause the remaining steps in the expansion process to allow us to focus exclusively on resolving our active audit issues, and cannot yet determine if a launch in fiscal year 2023 remains viable. Turning to our balance sheet. We ended the quarter with $199.5 million in cash and cash equivalents and had $88 million in total debt on the balance sheet, representing debt under our senior secured term loan, plus capital leases and other commitments. For the Q3 ended March 31, 2022, we recorded negative cash flow from operations of $7.5 million, and we had $9.9 million of capital expenditures.
Free cash flow, defined as cash from operations plus capital expenditures, was negative $17.4 million for the quarter and positive $2.5 million for the nine-month period ended March 31, 2022. In late December, we announced we were withdrawing guidance following the sanctions we received in Colorado and subsequent enrollment freeze. At this time, we do not believe it is prudent to provide new or updated guidance due to the ongoing audits and continuing remediation efforts. As Patrick indicated, we plan to focus on proactively remediating deficiencies across all of our portfolios. We can, however, provide some insight into the trends we are seeing today and the impact to our business in several key areas. Starting with revenue, we have already begun to streamline our teams and reporting structure, realign the sales and marketing functions, and add new leadership.
Although the recent COVID surge lengthened the time it took us to enroll participants into the program due to disruption from potential or actual exposure for employees and prospective participants in the Q2 and Q3 , we are beginning to see enrollment levels in our non-sanctioned centers return to pre-Omicron levels, and our mortality rate is returning to average levels. From a medical expense perspective, we expect elevated external provider costs due to Omicron to continue in the near term. Specifically, we expect inpatient and specialty costs and medical respite costs at skilled nursing facilities to remain elevated due to the increased risk of severe illness from existing underlying conditions when contracting COVID. In some of our markets, participants are returning to assisted living facilities at pre-COVID levels and above.
Finally, from a cost of care perspective, we continue to experience a tight labor market as we manage our employee base to meet the needs of our participants. As a reminder, we included market wage adjustments when we provided our initial guidance last summer, and we continue to closely monitor wages to ensure we remain competitive. We have seen elevated wage rates in certain critical positions beginning late in the Q2 , and we expect additional labor costs associated with the ongoing audit remediation and compliance to continue in the near term. As Patrick highlighted in his remarks, we are at an inflection point for the company as we emerge from the pandemic and address the challenges of the current sanctions.
However, I believe that the transformation we are undertaking will solidify our foundation to ensure that we are focused on people, service, and quality, and that we are well-positioned for scalable and sustainable growth for the long term. Operator, that concludes our prepared remarks. Please open the call for questions.
Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by. We compiled a Q&A roster. Once again, that is star one. We ask that you limit yourself to one question and one follow-up. Again, we ask that you limit yourself to one question and one follow-up. Our first question comes from Jeff Garro from Piper Sandler. Your line is now open.
Yeah, good afternoon, thanks for taking the questions. You know, I guess I'll start on the cost side of things. You cited 5 items pressuring center level contribution margins. Could you help us categorize which one of those you feel are near term and which ones might persist for some time?
Yeah, thank you for the question, Jeff. I'll get us started, then I'll hand it over to Barb. First thing I'd point out is the COVID-related cost. Clearly one where we saw a spike in January, I think with roughly half the population that contracted COVID in January. Those, you know, admissions, you know, were up for us, as well as some of the increases in utilization of skilled nursing days and some of the ancillary costs surrounding that. I'm going let Barb go a little bit deeper into the drivers.
Yep. Hi, Jeff Garro, it's Barb Gutierrez. Thanks for the question. As Patrick Blair said, you know, certainly in the Q3 , a significant portion of our higher costs as it relates to external provider costs were related to the Omicron surge. Of those excess costs, about 50% of those excess costs in some way, form, or fashion were attributable to that surge, whether that was inpatient, medical respite, ongoing specialty care. While we have seen COVID abate going into the Q4 , we expect those costs to come down in the short term but not completely go away. As you know, our participants are inherently frail and have a number of comorbidities.
What we are experiencing is a long tail, if you will, as it relates to those external provider costs for those participants. The good news is we have seen the COVID rate decrease toward the end of the Q3 and into the Q4 . Again, those costs won't go to zero in the Q4 . There is a tail associated with that.
Secondly, the wage increases were a factor as well. You know, like, I think everyone in the healthcare industry, we're seeing a lot of pressure and a tight labor market, and we've done a number of increases related to our staff, as well as trying to close the gap on some of our staffing. You know, that will continue as well. We did have some more one-time costs in nature related to organizational realignment that will not reoccur in the Q4 or in the near term. You know, just some of the overall other costs. You know, we foresee sales and marketing are nearly flat quarter-over-quarter, and that really results from the seasonality. We see that being pretty constant.
Our G&A are really investments in transformational activities as well as some compliance activities. We'll see that continue a bit into the Q4 as well. I think I hit them all.
I think so.
Yeah. Yeah. Great. All super helpful. Maybe to follow up a little bit, focusing on the cost of care line and just trying to think about, you know, I think, you know, great in the tight labor market, you're able to add 100 net new FTEs. So I'm curious, you know, what roles you were able to hire people for. You know, just trying to parse out how much of the increased cost of care, despite where census has trended, is related to wage pressures and how much is related to, you know, all of those efforts that Patrick discussed around becoming a stronger provider and delivering a stronger value for your members.
You know, it's a bit of each of those items. We have seen in terms of the wage pressures in the high single digits% compared to a year ago, and I think that's been consistent with what we reported on other calls, that kind high single digits%. That is definitely a factor. Adding the new employees is another factor. We are continuing to work on that and strengthening our recruiting. I think it's a bit of both.
Yeah. I might just add on and just reinforce that, you know, we've identified a core set of positions that, you know, we really put into the critical hiring bucket, including nurses and CNAs, personal care workers, and various therapies and social workers. If memory serves me, the last couple of months, or at least maybe the last quarter, we've had roughly about 200 or so of those that we sort of carried as a vacancy. I think we've made progress on at least 30% of those just in the last, you know, 6 weeks to two months. We've got a very focused effort on these critical positions and are really, I think, doing a great job attracting people to the company and attracting people to the mission and purpose of the business.
We're starting to see some improvement in the recruitment of these critical roles.
Good to hear. Thanks for taking the questions again.
Thank you. Our next question comes from Sarah James from Barclays. Your line is now open.
Thank you. I wanted to go back to the comment that Barb made earlier about the ARPA regulatory change in Colorado. Just wanna confirm that was 30%, 30 cost increase with no rate offset. Then I was going through the last couple of calls. I guess you guys flagged a 5.3% rate increase for Colorado and Virginia in November related to housing costs. Just wanna understand, if we look at this as like a 2 year run rate, what exactly is going on with housing costs, and how should we think about that as a % of your total cost structure?
Thanks, Sarah. Let me clarify the Colorado ARPA. Sorry, I paused there 'cause there was a little bit of an echo. Let me just clarify that. I think in the remarks, you know, I said there was no direct reimbursement. There's definitely some indirect reimbursement. We received some ARPA funds. We received as a matter of public policy adjustment related to ARPA. We've received a couple increases there. The structure of it is not a direct one-for-one reimbursement. The philosophy there is we are being reimbursed through some of the ARPA and inherently through our rate structure. You know, we are still in discussions with the state of Colorado as it relates to FY 2023 rates.
You did understand correctly, it was a very significant increase for ELF. It was over 30%. A significant portion of our participants in Colorado actually live in ELF, which is why it's pretty significant for us. The other increases we mentioned in previous quarters, we also received from Virginia about a 2.5% increase related to ARPA. In some parts, that covers some of that housing increase. We do not have the same level of housing in Virginia, so it's not the same issue from a reimbursement perspective.
Great. Can you size housing costs for us? Like what percentage of your cost of care line is it? Or, how should we think about factoring in some of these increases into the model?
Probably not off the top of my head. Again, you know, think about over a 3rd of our participants in Colorado reside in ELF, and I think that's the way to think about it.
Okay. Thank you.
Mm-hmm.
Thank you. Our next question comes from Jamie Perse from Goldman Sachs. Your line is now open.
Hey, good afternoon, Patrick and Barb. Patrick, maybe to just start with you on the eight initiatives you outlined. Obviously a lot going on to remediate the audits and just improve quality of care overall. How would you kind of characterize where you are in terms of establishing these initiatives, the timing that we should be thinking about for some of the different initiatives? Where the easier lifts are versus some of the more challenging longer-term lifts? Just a little bit more color on how we should think about, you know, I don't know, phasing or implementation of these key initiatives going forward.
Sure. Thank you for the question. You know, I would start by saying that we're making progress on all 8 of these. I mean, you know, clearly, there's different impact and value for all of them, but we are simultaneously executing sort of full speed ahead on all 8. If I think about where it all starts, clearly the critical personnel gaps is the foundation for everything. As I mentioned, you know, we've identified the critical personnel and are making significant progress. I think I said 30% of some of what's been sort of in our vacancy run rate, we have been able to fill.
When I think in terms of those that, you know, I think are having the greatest near-term impact, 2, I would call out would be, one, scheduling care with outside providers. We've made a lot of progress on building our, you know, our tools and our processes to ensure that our people are being scheduled at external providers as quickly as possible and as timely as possible. That is an area where getting people to their provider really starts, you know, the care delivery model for us. That's critically important. We're making great progress.
The telephonic channel with our phones just being available to our participants and their caregivers and make sure that, you know, every call that comes into the center, we're returning that call on a timely basis, and then we're documenting the needs of the population. I think that's an area where we're making really good progress on. One of the areas I think's going have a longer tail on it probably won't surprise you, is sort of strengthening our home care network and the reliability. You know, this really ties back to the people constraint, is, you know, finding the right number and the right skill set within the personal care worker is really important to us, and it's an important part of what we need to do to keep people living independently in their homes.
I think that's an example of one of our, you know, initiatives that's going take longer. For the most part, I would say we're expecting all the, like, let's call it phase one of all eight of these to be in very solid footing. By phase one, I mean, we will have addressed the compliance issues. If I had to break it up into sort of phase one is really about making the changes necessary to address the audit findings and to remediate those issues everywhere they exist. I think we will be complete with that by the end of this year.
The next phase is really more transformational in nature, and it's really taking each of these eight areas to the next level of efficiency using technology, using more automated business processes, et cetera. I think that, you know, that's probably more on the 18-month to 2-year timeframe to take things to sort of the next level. Certainly remediating the deficiencies by the end of this year across all eight initiatives is an expectation we have.
Okay. Thanks. That's really helpful. I wanted to follow up just on the status of the Sacramento facility. I know the CAP is in place there, and you're I guess the question is, what's the level of oversight right now by auditors? Are they monitoring you on a kind of day-to-day basis, or what does that look like? Is it still right to think that there'll be a phase you go through where they're monitoring pretty closely and then they let you operate more independently for a while, and then beyond that is when the enrollment freeze might be lifted?
If I could just sneak in one more, if Virginia and Pennsylvania, you know, what the status of conversations is like there, what their familiarity is with your other audits and, you know, how you'd kind of characterize the risk of, you know, changes?
Sure.
In dynamic there. Thanks.
No, appreciate the question. Yeah, starting with Sacramento, I think you articulated sort of the audit cycle well. There's always a great deal of engagement with CMS in the state, but you're correct in that we're, I'll say, at the precipice of where CMS's level of monitoring is done much more through reporting oversight. There are specific measures, which nine of them that we are being measured against in Sacramento, and we're reporting that information to CMS sometimes on a biweekly or a monthly basis. We're very pleased with the progress we're making.
If we can keep that progress up, you're correct in that the next step would be for CMS to give us some time to make sure those changes and those results are sticking and then come back in and do an audit again, a quick audit to see where we are, to make sure the changes have stuck. It's our understanding if that all goes well, then we are positioning ourselves for sanctions to be lifted. But of course, that's always in the discretion of CMS. You know, I would just say really pleased with the team's progress in Sacramento.
As it relates to Virginia and Pennsylvania, how I would describe that is, our close work with CMS across multiple markets now and the themes they are seeing, across our markets and the progress we're making across addressing those deficiencies, you know, I believe CMS is acknowledging that we're making good progress. We're focused on the right issues. We're remediating things timely. We've got a strong, open communication channels between us. As a result, we have not received any notice from CMS or the state of Virginia or Pennsylvania on any planned audits. Of course, they can happen at any time, but we always receive a notice in advance, and we have not received anything yet.
you know, I think our belief is we're working closely with CMS, and they're very aware of our themes and our progress. We're applying the learning, you know, to all the markets. Anything we learn in Sacramento, New Mexico, Colorado, we are bringing those same things to Virginia and Pennsylvania proactively.
Okay, understood. Thanks for the update.
Thank you. Our next question comes from Matt Larew with William Blair. Your line is now open.
Hi. Thanks. Good afternoon. Barb, I wanted to follow up on your comments. Obviously, you're not giving guidance, but you did kind of describe what you're seeing in terms of current trends with enrollment at non-sanctioned centers returning. I do wanna clarify, though, with about two-thirds of your census, you know, falling into sort of Colorado, New Mexico, and the California centers and 2% attrition per month, I mean, we should be expecting sequential declines in census for some period of time here. Is that fair to say? I just wanna make sure that we're not misreading the commentary about enrollment returning to the non-sanctioned centers into something that's not going on company-wide.
Yeah. Thanks for the question, Matt. The only clarification I would make is that the centers on sanction are Sacramento and the Colorado centers currently. I know in your question there, you included other California centers in New Mexico, which are not currently on sanction. Then in addition to that, there's Virginia and Pennsylvania.
Right. I guess just to clarify, your sort of internal expectation, given that they're following the path of Sacramento, Colorado, is that they will eventually be sanctioned. You go through a similar process or sort of what's in your operating model for that?
That's not what we're assuming, especially in the comments that I gave just a bit ago. The comment is, again, you know, on the non-sanctioned centers.
Yeah. This is Patrick. I think I might just punctuate the point in terms of, you know, internal expectations. As I've said before, you know, this is entirely in the discretion of our regulators, but I think internally, we recognize that both CMS and states have a broad range of options available to them when it comes to enforcement of audit deficiencies. A corrective action plan with an enrollment freeze is just one of the several options that CMS or a state has available to them. I think as we think about each market, we think about it on its own merits, and we think about the latitude that CMS has.
That each market that while the themes may be similar, the actual severity and frequency, that, of the deficiencies could vary by market and could lead to very different outcomes. You know, that's sort of how we're thinking about it. I think, you know, as we think more broadly to markets that aren't under sanction, in addition, we also think about the proactive nature of our work to address audit deficiencies that maybe an audit hasn't occurred yet, but we're already at that location looking at the opportunities, looking at what we've learned from the other markets and seeing if there's an opportunity to get ahead of it. I would just add that color to Barb's thoughts.
Okay. That's really helpful, Patrick. Then Patrick, maybe just digging with some additional commentary. You referenced some of the corrective actions that you've taken. You also said you identified sort of root cause for all of them. I'm curious, could you share with us what in your view, the root cause a lot of these issues were? The reason I'm asking is I think it'd be helpful us to understand if it was deficiencies in people or processes or technologies in order to help frame what the type of investments are that are going be required to really solve, you know, not a surface level, but at a root cause across the organization.
Sure. Be happy to. I would first say that for any deficiency, I always think of it, we always think of it in terms of people, process, and technology. You know, although business process automation or introducing the new technology can be expensive. I think what we're finding in more cases than not is that simple technological advancements or automation can make a big difference in the deficiencies we need to close. It very much is about the fundamentals of having the right people, having solid business processes and policies and procedures that are followed, and having tools that help our employees be efficient and you know, enable them in the work that they're doing.
In terms of the root causes, just you know, working from sort of top of mind here, you know, it's things like ensuring our medical records are documented with all the required data elements. Much more people in policy and procedure-focused. Ensuring, you know, that our care plans are complete and kept timely. A lot about training and people and process. The heart of our business is this multifaceted interdisciplinary care team at the center level, making sure that team is each day capturing input from all other team members. Whenever that information is available, it is being documented in the EMR or in other tools that feed the EMR. There you're getting, again, a training of people, process, and tools to capture data. Making sure that our service orders are being scheduled on a timely basis.
Making sure that when you know a participant or a caregiver requests a service, that we're identifying that appropriately and we're documenting it. You can get a feel for it. Those would be the things that I would say are root causes of our compliance deficiencies. They're the fundamentals of basic blocking and tackling. The eight initiatives that I articulated, I have a great deal of confidence that if we execute flawlessly on those eight initiatives by the end of the year, they substantially account for, and it will address all of our audit deficiencies. Next year and the year after, we begin thinking about how do we take those to the next level and become more efficient, more automated, more controlled. Hope that's helpful.
That's really helpful, Patrick. Thanks for all the commentary.
Thank you. Our last question comes from Andrew Lothian from JPMorgan. Your line is now open.
This is Andrew. I'm for Lisa Gill. I just wanted to go back to your comments on patient acuity going up over time. In light of the freezes, I was wondering how you're thinking about driving growth in existing markets, given the compressed marketing spend. The limited growth would probably seem to indicate that cost of care would remain, you know, a bit elevated relative to historical patterns. I was wondering if you had any incremental color on that. Thank you.
Well, I can share a little bit on the sales side, and if someone else on the team wants to weigh in. You know, as it relates to our sales and marketing costs, you know, we're very cognizant of our ratios for sales and marketing, and we've been very smart about how much of a cost structure we maintain, given that we have markets under sanction. We've taken steps already to reduce costs in the markets today. Then on the marketing side, because these are highly variable costs, you know, we've already taken costs out of the marketing side of the equations, which is going allow us to move, you know, more quickly.
We're also deploying sales resources in sanctioned markets to, let's call it, participant experience and retention efforts in both sanctioned markets and non-sanctioned markets. That's relevant because we're, you know, very much focused on that portion of our disenrollment rate that we can control, and we're using those resources from a participant experience perspective to help with some of that disenrollment. I think as Barb mentioned, we're starting to see some of that play out in, you know, the current period. As it relates to the risk pool, I'm going to ask Melissa to say a little bit about that, but you're, you know, exactly right that, you know, we've had quite a few participants contract COVID. As they leave the hospital, many of them were no longer able to be at home and reside in higher cost settings.
Especially in a market like Colorado, where it's one of our largest markets and where we have the highest degree of sort of over-utilization, you know, we clearly have a challenge of, you know, not bringing in enough new lower acuity participants into the pool. You know, that's something that we're very focused on and looking for every opportunity to manage that population as well as we can. Let me ask Melissa, though, to weigh in too.
Hi, Andrew. It's Melissa Welch. Yeah, I think Patrick captured the cause of the increased acuity. Certainly in this last quarter, COVID had a huge impact on our participants' acuity for the quarter. Mix is important to us, so it is going be important for us to continue to bring in newer, ideally less sicker participants on some aspects to help dilute that. But our real focus is going be on being able to predict the acuity. Some of the technology investments that were identified by Patrick earlier will help us to do that. Our new EMR technology is also going to help us to do that.
I think that ability to really predict our cohort of acuity and manage it upfront more accurately is going be a significant value for us in the long term.
Yeah. I'm going to just add one last thought to that. You know, naturally we have a number of initiatives that run on a daily basis, where we're focused on things like the short stay at skilled nursing facility and the length of stay, as Melissa mentioned. You know, a variety of site of care strategies that we have in place to try to address the utilization. A number of things around the use of ER and trying to reduce the unnecessary use of ER. You know, all these things I think also play to really highlight the importance of a more sophisticated payer strategy and capabilities going forward, which I mentioned in my opening remarks.
Thanks for the colour.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.