Thank you. Good morning, everyone. I'm Jamie Perse, the healthcare provider analyst at Goldman Sachs, and our next session today is with LifeStance. We have the CFO, Dave Bourdon, and IR, Monica Prokocki. Thank you guys for joining.
We're glad to be here.
Good.
Thanks for the opportunity.
Of course. Well, let's start just with the, you know, the new strategy you guys are focused on, really building the foundations, the operational excellence. How's all that going, you know, as you kind of scale that and prepare for future growth?
First of all, you think about the company in a couple of chapters. The first chapter was about growth and getting to scale, and that was the primary focus. Now as we shift to the second chapter, and that's really more of a balance. With a focus on operational performance, profitable growth, and capital, and, you know, just being smart about how the use of capital. When we get into the strategic priorities, and improving that foundation, we're making a lot of small investments in areas like clinician recruiting, patient referrals, RCM, but we've had the 3 big strategic initiatives that we've highlighted, which are the HRIS or people management system, our credentialing and onboarding system, and we're also doing EHR exploratory. The first two are going well.
We already signed contracts with vendors, and we're well underway. On the EHR exploratory, that work will be ongoing throughout this year, with the idea then of making a call around: Do we enhance our current system and stay with that, or do we look for a different tool? Again, going well and a lot of heavy lifting around You know, improving processes and things like that as a staging to being able to jump to those new tools.
How should we on the outside kind of monitor your progress on all these fronts? Obviously, we look at, you know, growth and margins.
Yeah
Things like that. In terms of being at a point where you're ready to kind of go on offense more aggressively, how do we monitor, you know, where you are in that progression?
Right. We've been laying a little breadcrumbs because I know it's, I can appreciate your perspective around, "Well, you're saying you're doing all these things, but how do we monitor that progress?" An example of, we made investments in RCM. You saw the big decline in DSO in the fourth quarter, and we'll see further improvement in DSO throughout this year. That's an example of that. Something like the credentialing and onboarding, that's gonna play through in our clinician starts and our clinician growth. It just depends on which investment you're talking about.
HRIS and the people management, that's gonna be more behind the scenes, but when you're a company with over 8,000 employees and you don't have a true people management system yet, you know, it's. There's just a lot of unnecessary manual work. You won't see that as easily, but it'll be part of our story around operating leverage as we get into 2024 and 2025 and seeing the bottom line margin improve.
Yeah. You guys have given some sustainable growth targets over, you know, the medium term. I guess what I'm trying to understand is, as you're putting all these pieces in place, is it building towards a moment where you can, you know, step on the gas-
Yeah
There be an acceleration? I mean, how should we think about what the later innings of this process-
Yes
look like for growth?
Got it. Yeah. For 2023 and 2024, we've looked at those as foundational years. As we get into 2025, we've said for that year we'll be free cash flow positive. I feel like that is the transition year where we can start, to use your words, we start stepping on the gas. There's a couple of areas I'd point to. First would be M&A. Once we have our foundation solid, then we'll look at M&A opportunities, again, with the positive free cash flow, being able to fund those. The other area that I would point to around really stepping on the gas would be these higher revenue, higher margin services.
I've talked on the calls about Neuropsychological Testing as an example, but there's a number of kind of these basket of services that we do in little disparate places throughout the country that have come from our acquisitions, but taking those, standardizing them, operationalizing them, and then rolling them out. I think that's how we get from mid-teens organic growth to stepping on the gas to a higher number.
Okay. Okay, that's helpful. Let's go a little bit more specific and maybe short term, but can you describe what the clinician funnel looks like? Yeah, I'm sure you have a huge database of, you know, however many thousands of how do you whittle that down to your prime targets that you think you can approach and convert? Any color on the pipeline?
Yeah.
Yeah, sure. We do believe that there's a large clinician market out there of hundreds of thousands of clinicians, and we do have a proprietary database of hundreds of thousands of clinicians. We believe that we've probably only tapped 1% of that market, so really think there's a lot of runway and white space ahead of us there. In terms of how we whittle that down, as, you know, it's really based on the markets that we are focusing on, and the clinicians go through a multi-step hiring process, including our clinical and medical leadership, who ultimately makes the final decisions on the clinicians who join LifeStance. It seems that our recruiting engine has actually been working really well.
The efficient hiring process, along with the investments in the recruiting team and the clinician value proposition, have driven robust organic growth. As we kind of put a pause on M&A, that continues to be a key focus area for us.
Okay, I'll definitely come back to the value proposition in a minute. Just in the last few quarters since Ken joined and Danish took on more responsibility, has anything changed in how you're, you know, targeting these clinicians and converting them?
I would say that the key change is really focused on the operational performance of the business, kind of how we operate. Improving things like frontline support and billing, all of those things that enhance the clinician experience, those are really the focus area for the long term. Last year, we ran a detailed survey of clinicians to identify pain points and all the operational improvements that we're focusing on. You know, some of those are to really improve the clinician experience, which will help improve both retention and recruiting in the long run.
Okay.
I would say that's been kind of the key change.
What are you seeing competitively? These clinicians are obviously in very, very high demand. I mean, we heard from United yesterday about the demand for mental health. Are you running into folks in the market? Are you seeing anything competitively that you'd call out?
I wouldn't point to anything that's a big change.
Okay.
It, it remains a highly competitive marketplace, and I think the thing to highlight is our value proposition is resonating with, clinicians, and you're seeing that in the, in the recruiting process. One other thing I'd pile on that Monica said about the recruiting processes is that unlike some of our competition, who they do... they'll take all comers, we go through a very rigorous hiring process, and once we whittle that down to, a short list, for every 2 or 3 that are highly qualified, we're only making probably 1 offer on that. It's, it's a different model. Again, we're looking for fit, with that clinician, and, it's just a different approach, but it remains a very highly competitive marketplace.
Okay. I wanna go to clinician turnover, which, yeah, has been a focus for investors with the story and the value proposition.
Yeah.
Try to make sense of all that. That's probably one of the bigger things that changed quickly out of the IPO. I mean, I guess, do you think you're still ahead of the market in terms of the value proposition that you're offering to clinicians and on turnover specifically?
I wouldn't say that we're ahead of the market. I might say it a little differently. First of all, we're not trying to be all things to everyone. There's a subset of the clinician population that we believe our value proposition resonates with. We've seen our turnover stabilize in the back half of last year, and in, you know, through the first quarter, and you saw that with the clinician growth numbers that we put up in the first quarter. again, I wouldn't, from a, you know, turnover perspective, I wouldn't say we lead the market. We just feel it's stabilized, and there's opportunity for improvement as we get into strengthening our value proposition.
Monica pointed out that, you know, the big pain point for them is really around the support. These clinicians, one of the reasons they join us is we say: We'll take care of everything for you. All you've got to do is come in and do what you love to do, which is treat patients. We'll take care of billing, front office support, things like that. There, that's where we, with that heavy growth focus and 93 acquisitions, there was noise in the system, and that's a huge focus area for us to improve that support for the clinicians. We feel if we do that, there's the potential that we could improve our retention even more so in the coming years.
Okay. A couple follow-ups from that. I mean, you talked about the survey and identified these pain points. can you say those are actually the reasons why these clinicians left? or, you know, maybe it's wage and other things, but these specific things that you're addressing. Then, how soon do you think you'll be at a point where those pain points are addressed across the whole platform, and you can... You know, I know you're not signaling that you're going to reduce turnover, but be in a better position around retaining clinicians.
I think in terms of, why clinicians turnover, I think it's really there's kind of a wide variety of reasons, and, you know, that was kind of, you know, true across the market to, you know, folks. Some folks were just leaving the workforce during the pandemic, for example, all different reasons. I think in terms of when we might turn a corner, I think as we are making these investments over the next couple of years to streamline the business, standardize the business, build scalable infrastructure, just really simplify and automate and make things easier for everybody, for not just clinicians, but also for team members, I think we'll see improvements and enhanced experience that should pay off.
Okay. Maybe, Danish, rephrase what you said. You still feel like you're adding incremental value to, you know, the value proposition to the clinicians?
Yeah.
Absolutely.
Okay.
Absolutely.
Let's, let's go to productivity. You know, it's, it, the revenue generated per clinician has been down over the last couple years, you know, high single digits for the last two years. You started to turn a corner in the first quarter. You've broken this down by capacity, the time they make available and your ability to fill that. Where are you, sort of, from a capacity standpoint, you know, 6,000 clinicians, is there a theoretical, you know, like, this is what that body of clinicians should be able to do, and this is what we're getting from them? Just any color on where you're at from capacity side?
Yeah. We don't think about it from a, you know, what's a normal level of capacity or we're going at it more of what are we getting today, and how can we improve that? It's less controllable than utilization, which is the other, you know, the other aspect of productivity. There are things we're doing to improve capacity. For example, we are rewarding our highest performing clinicians with equity, so that's a, you know, productivity improvement.
We're doing things, like that, and we're exploring other ways of trying to incentivize clinicians giving us more capacity, in addition to when we're hiring new clinicians now, we are looking for full-time hires rather than part-time hires, which might have been something we had done in the past, so those clinicians will obviously, being full-time, would have more capacity than the average clinician in our, you know, in our current 6,000.
I guess even more specifically, can you say, you know, on average, the clinicians you have in your company can do, you know, 30 visits per week, 35 visits per week, you know, any guideposts?
Yeah, it depends. It depends on whether you are a prescriber or whether you're a therapy, 'cause there's different kinds of visits, right? A prescribing visit can be 15 minutes, and a therapy visit could be 1 hour. It's a little, you know, there's a little bit of apples and oranges, but in general, we'd say 30 visits, so about 30 hours of clinician time a week is full time for us.
On the utilization front, can you talk about what you're doing to, you know, reduce cancellation rates and make sure that the time made available by your physicians is, you know, being filled as much as possible?
Yes, a huge focus area for us, 'cause, you know, I mentioned earlier, this is something that we have more control over versus capacity. We have a number of initiatives underway, and we saw some positive signs in the first quarter as our revenue beat, we attributed to improved productivity, and it was specifically the utilization component. An example of that is the improvements that we saw in no-show and cancellation rates, which improved about 200 bips from 14% to 12%. Things we're doing there are improvements in the front office staff and how they're interacting with our patients in advance of the appointment, as well as when we do have a cancellation, being able to take advantage of wait lists and things like that to get a last-minute fill-in.
That's how we're, you know, we're able to see an outcome like the improved cancellation rates.
The business still skews more towards, you know, telehealth at the moment.
Yep.
Is there a differential cancellation rate? I know you get asked all the time about where this mix is going.
Yeah.
We think about that. Does that have any implication on the cancellation rate or even just specifically utilization?
It doesn't. We would not point, I would not point to anything that is materially different from an in-person versus a virtual as far as the cancellation rates go.
Okay. And trying to get a sense for the revenue-generating capacity of these clinicians.
Yep.
You are at 42,400 in the first quarter. There's a couple different ways to measure it.
Right.
You know, you can annualize that, maybe $170,000. Where is that relative to what a mature clinician, you know, looks like? Should we expect continued progress? How to think about the growth algorithm for revenue per clinician?
Yeah, I'm not going to say anything for this year because it's early stages, really, on the operational improvements that we're focusing on. I would expect there to be improvement, and areas that I would point to are, for example, the, you know, two items that I mentioned, the rewarding of productivity, the improving the mix from, to, from more full you know, part-time to full-time clinicians. That's going to help. The other areas where, again, we have more control would be the ramp time for a new clinician.
As we get more sophisticated in boots on the ground in generating primary care referrals or working with payers around getting improving the pipeline of their members in for new patients, things like that, they're going to allow us to ramp our new clinicians, which bring down that average that you know, that you highlighted. There are definitely opportunities for us in the future to be able to improve that overall productivity.
Are you able to say at all what mature clinicians on the platform today kind of, you know, on average, generate, your top, you know, 25% of clinicians, something like that?
Yeah, we don't share that kind of information. I mean, it's certainly something that we look at, but as you would expect with any workforce, you're gonna have kind of a distribution around performance, and it's, for us, it's better understanding why certain clinicians have, you know, are able to do more visits than others. If you remember, our model is different than some in that, like a full-time salaried model or something. This is fee-for-service. There are clinicians who simply want to earn more or like doing, just really enjoy care and the treatment of patients, and so want to do more visits. You have others that are looking for a better work-life balance, and so they're not gonna do as many.
It's always, you have to be careful to say, "Oh, the top 20% do this many visits, let's get everybody else there." These clinicians are all coming at it really in a different place in their lives.
Okay.
and motivations.
Let's switch topics a little bit, just patient sourcing. You guys recently announced the Gennev partnership. You know, I think I generally think of a huge imbalance between supply and demand in this market. Why do you need partnerships like this to, you know, to find the patients?
Yeah. The, it's a channel for us to get new patients, you think about it's, it's a win-win-win, right? The primary care, or in this case, an OBGYN practice, they're trying to get mental access for their patient to mental health care, that's in-network, it's affordable for the patient. That's a challenge in the current environment, 'cause most mental health clinicians are still out-of-network and only accept cash. That's a win for the medical practice. It's a win for the patient 'cause they're getting quality care. Again, they get to use their insurance card rather than having to go out-of-network and pay. It's a win for us because this is a no-cost channel of new patients that we're able to get. That's our primary channel.
We've invested in boots on the ground because that's where we get the most of our new patient referrals, and it's what's going to allow us to ramp new clinicians faster, as an example.
Okay. You've also talked a little bit about online marketing and, you know.
Yeah
... generating more of a, you know, organic kind of funnel of patients.
Yeah.
What does this do to customer acquisition cost, you know, patient acquisition costs over time? Again, the question is just like, why do you need it if there's, you have so much demand, maybe from primary care...
Yeah
your other referral sources?
Yeah, it's really about helping the prospective patient find you, right? Which is challenging for prospective patients in the current environment. For any of it... You know, I have 4 kids and one of my kids needed to get tested for ADHD. You go to your primary care office, if they don't have some kind of referral program like this, they just print out a list of prospective potential mental health companies. You start dialing, most of them will say they don't accept the insurance or they don't accept new patients. It can be the same experience over with the payer. Being able to establish programs like the referral, that, again, that's the win-win-win.
We also, our other primary channel is payer. I think there's, with the payers needing to find access for their members for in-network care, there's creative things that we're now talking with about, with, I'd say, thought-leading payers, as a way to get that patient flow. Paid marketing, I view as it's our last resort. It's a very small percentage of our new patients come that way. I would like that to be zero. We really only use it, for the most part, as a tactical solution when we have hiring of a number of new clinicians in a particular area. We're not able to get as much patient flow as we would like from those other no-cost sources. We go to paid marketing as a last resort.
Okay. let's shift gears again. We talked about the competitive environment for these clinicians. What are you seeing in terms of what you need to pay, just wage pressure, well, more broadly, compensation pressure for these clinicians?
We do see wage growth, and our clinicians have always been in high demand, so that's nothing new for us. It's kind of built into how we design our compensation structure. We plan every year for merit increases, which is well received by our clinicians, but our rates, you know, offset our wage increases. That's typically our expectation. Part of our negotiations with insurers, we're, you know, very focused on the fact that we need to compensate our clinicians for the good work that they do.
Okay. We can go to the payer side for a minute. Maybe first you've consolidated your payer base down to, you removed, I think, 25%, 30%.
Yep.
It sounds like this won't have any impact on demand or your ability to fill, and it's more of a cost initiative. Maybe we can start on the cost side. What does it actually do from a, you know, cost perspective, the efficiencies it creates?
Right.
We can get into the rates as well.
Yeah. You're right, Jamie, we've reduced our payer contracts by about 30% or 140 contracts. It's a modest amount of revenue. It's less than 1% of the volume for us. This was really done from an efficiency perspective. How it's playing through is, these are now 140 contracts that we don't need to credential our clinicians with. We don't have to take into account the complexity of these in our patient intake process or our billing, you know, RCM teams and things like that. It's a piece of a bigger operating efficiency initiative that we have, so that we can drive operating leverage as we get into 2024 and 2025 and beyond. It's a piece of that story.
The side benefit, or unintended benefit of it is, we're getting anecdotal feedback from payers that weren't part of the 140. Again, they're focused on access. They're concerned. They're like: "Are you done, or am I getting a call tomorrow?" It's a bit of a shot across the bow around, Hey, like, we wanna work with payers that are gonna partner with us. Part of that is rates, and part of that might be some type of value-based contracting, but it's also just administrative simplicity. Like, if you're, if you're difficult to deal with and you've got low volume, you know, you may be on the next list.
It's an interesting point. The 141st, the one that didn't get the letter, do these efforts help you in terms of, you know, driving rate increases? More broadly, how should we think about long-term rate growth? Monica, you mentioned it offsets wage growth. Is there a positive spread at all, or should we just think about it as offsetting wage?
There's a modest positive spread this year. If you look at our guidance and look at Center Margin, they're modestly improving year-over-year, and that would largely come from that dynamic of payer rate increases being a little bit more than the clinician increases. That's for this year. As you think about future years, payer is one of the areas where we've invested, and that investment is starting to pay off, and we expect to get a low, you know, low single-digit revenue increase this year as the result of payer, our payer focus. We would expect that to ramp up in future years.
When I've talked about exiting 2025 with double-digit margins, payer rate increase is a 1 of the major levers of that story. You would expect to be able to both compensate our clinicians appropriately and improve the bottom line margin as well.
I guess, what visibility and confidence do you have that you can drive incremental rate updates, you know, in?
Yeah
next year and beyond? I get some of it's just the market and demand for these services, but is there a LifeStance-specific piece in terms of your scale that is giving you this confidence?
There is. For some of the... If you're a national payer, we are likely your largest mental health provider and for outpatient services. It's a different, and again, this is about a partnership. This isn't just us beating them up over, "We want higher rates." It is about a partnership where they're interested in access and quality and, you know, things like, can they, can they even connect their system to our scheduling system to get. Which would improve access for them? There are different kinds of conversations now with payers, especially the national ones, or where we have concentrated volume, that is our conversations we have not had in the past. It's, so there-- we have confidence.
We've seen some positive momentum already this year in, like, little spots. I'm not gonna say, like, it's not systemic yet, but we do. We're seeing enough bright spots that we have confidence and that we'll be able to deliver this in the coming years.
Okay. We started with the operational enhancements and, you know, the EHR and all the capabilities you guys are building out. I wanna tie this to G&A growth. How should we think about what costs still need to be, what investments need to be made and, you know, where you're gonna start seeing leverage in G&A?
G&A, if you're looking at it year-over-year, is up significantly. If it's fourth quarter to first quarter, you know, it's more like 13%. It's not as much as what it is on a year-over-year basis. We are continuing to make investments. We've said 2023 and 2024 were foundational years, but 2023 was the one year where our G&A growth would outstrip revenue growth. Ken and I have said this is a one-time deal. We will start seeing operating leverage next year in 2024, and even more so in 2025, and that's another one of the big levers that gets us to those double-digit margins by end of 2025.
I guess maybe another way to ask it is the G&A expense in 1 Q, does that yet reflect kind of many of the investments that you've made, or should we expect, on a dollar basis, continued step-ups this year? Does that, you know, maybe exit rates for 2023, is that sort of the right, you know, level of spend you need for 2024 and beyond?
Yeah, I mean, I would expect that we will continue to make some investments this year, and then as we look at next year, you know, meaningfully less investments from a G&A perspective than we made this year. I'm not gonna say we're done, but it, again, you will see operating leverage next year.
Okay. Is there any way to say what, you know, after this year, what G&A expense should grow at, or the spread between G&A and...
Yeah
revenue growth?
We're other than to say it's gonna be lower, right? That's about as far as we're gonna go right now. I would expect the spread between revenue growth and G&A growth to that spread will increase as we move from 2024 into 2025, 'cause there'll still be some investment next year.
Okay. You've talked about this 10% margin exiting 2025. Are there opportunities to pull that forward or, you know, that's not the priority right now? Just wanna, you know, gauge where you are in terms of that being a priority to maybe pull it forward versus just focusing on the operational areas.
I think we're focusing on the operational performance. While there could be a potential that we end up getting to the destination sooner, that'd be a nice problem to have if that was the case. That's not... You know, I wouldn't say that's the focus. It's more of heads down, we know what we need to do, let's get, you know, let's get these big things done and out of the way so that we can, you know, to your earlier question, we can put our foot on the gas.
beyond, I know 2025 is still a couple of years away, but even beyond 2025, is there a structural ceiling to margins? I mean, how should we think about where to from there, just on a longer-term basis?
Yeah, we're, we certainly haven't guided to anything. We, you know, on one hand. On the other hand, we are not saying that when we exit 2025, that we're now at the ceiling. We still believe that we will have room to run as far as improving bottom line margins as we get into 2026 and beyond.
Okay. How should we think about the introduction of M&A back into, you know, the, as a growth driver? Is next year too soon to think that could start to, you know, be a priority again, or how should we think about that?
We definitely expect over the longer term for M&A to complement our organic growth. you know, as Dave mentioned, we've guided to free cash flow positive in full year 2025. When we do start doing M&A again, it will be out of our free cash flow. We also expect that to be very opportunistic and extremely selective, so really ensuring that those acquisitions don't add significant administrative burden on the organization, that there are limited exceptions in terms of payer mix or service lines, and that they're profitable. We do expect to reintroduce M&A, but just be very selective about it and fund it from positive free cash flow.
Okay. Maybe last quick topic here. Just guidance for the year. When I kind of work through it, sort of implies not a lot of step-up in productivity and all these things that you guys are really focused on the revenue side. Maybe just any color on, you know, things you're considering in guidance that, you know, are preventing further improvement this year.
Yeah. I wouldn't point to there's a problem or a concern area. That'd be number 1. Number 2 is, I would remind everyone that now that we've shifted really to organic, you don't have the M&A lumpiness in there. Our revenue is more 50/50, first half, second half, even with clinician growth, which we would expect throughout the year, because in the second half of the year, our clinician capacity goes down due to vacations. You have the summer vacation season and really Thanksgiving through New Year's, and so we just get for the same clinician, you just get less time from them to be able to fill with patients.
Okay.
It's more that. The third piece I would say is that we were clear in our updated guidance for the full year, that the productivity improvements we saw in the first quarter, while we were happy to see them, we did not bake them into the full year. We don't have any reason to believe that they won't occur, but we just don't have enough of a track record yet to be able to be able to hang our hat on. Those are durable and will and stay throughout the year. It's more that than we see a problem off on the horizon that we were trying to adjust for.
Okay. I know we're over time here, thinking of one last one. Just on the EBITDA guidance, I know you're not updating guidance here today, generally feel good about the assumptions that you've laid out at a high level?
We do.
Okay. All right. Good place to end. Thank you both for joining, and thanks everyone in the room.
Yeah, thank you for having us.