Good morning. Welcome to day two of the Jefferies Healthcare Conference. I'm Jack Slevin, one of the healthcare services analysts here at Jefferies, and I lead the coverage of the value-based care sector. I'm here this morning with Dan Virnich, CEO of The Oncology Institute. Dan, thanks for being here.
Yeah, thanks so much, Jack.
Yeah, and maybe we'll just jump straight in. You know, I think, Dan, to kick off, just leave the floor for you, sort of a state of the union, you know, what's been happening with TOI? You know, where should we level set on things to enter the conversation?
Yeah, absolutely. So, rounding out my first year as CEO, although I've been with the company for five years, really, the last year has been highlighted by a couple things. One is, a lot of growth, especially in the first quarter of this year. We saw kind of a record number of new value-based contract signings and, really expect that momentum to continue throughout the rest of this year, and I think a lot of that's being driven by some of the V28 changes and top-line pressure that risk-bearing groups are facing as they seek to, you know, find a way to manage their oncology spend and, and make up their MLR. And then, last year we underwent a fairly substantial restructure.
We're going into our third year as a public company, so really seeking to be as efficient as possible in our SG&A, to drive elimination of cash burn and become a, you know, profitable, sustainable company long term. So less focused on kind of expanding, you know, dots on the map, as in sort of our first two years as a public company, and more focused on, you know, now building into our capacity and driving profitability, and really showing our value prop to payers and medical groups.
Awesome. Yeah, I think, so where I wanna start with, you, you started with it as well, the momentum that you're seeing on the, the capitated contract and the value-based contracting side of things. Seven deals signed in the first quarter that are gonna roll on in the second half of this year. You know, great momentum there. I guess maybe two questions on that. One, how does that compare to where things have been, you know, in the prior couple years, as you mentioned, sorta getting into new geographies? There's been a little bit of a tail from entering the geos to getting some of those deals signed. What does that volume look like relative to prior years?
Mm-hmm.
And then, how should we expect the pipeline to sort of play out over the next year? Is it, you know, still loaded up? Is the seven really the deals that you have for 2024, or is there sorta more juice to squeeze?
Yeah. Definitely more juice to squeeze. I mean, we still see a lot of near-term opportunities, and we'll continue to talk about those and announce the impact in upcoming, you know, earnings calls. But I would say that, just comparing it to prior years, I mean, the first couple years I was at The Oncology Institute, we would do generally one or two big deals a year. So this is kind of multi-fold that just in the first quarter. And again, I think the really exciting thing about these newer value-based contracts outside of California, although we're continuing to sign deals in California, is that, in our legacy markets, you see a product mix of Medicare Advantage, commercial, and Medi-Cal, so the adjusted PM...
Blended PMPM is relatively low, versus markets like Florida, Oregon, which we're gonna be entering in Q4, even Nevada, you're seeing more of an MA predominance. So much higher sort of single product rates, and then much, much higher utilization, than in legacy managed care markets. So very, very attractive value proposition for payers in terms of what TOI can offer, and then great economics for TOI in terms of the contracts that we're signing.
Got it. Okay, really interesting, and I know part of that suite of contracts that are coming on. I think you're alluding to with the MA-heavy presence, but really, at least one thing I've picked up on is the sort of breadth it's showing of capabilities you have. You've got the Carrum deal, which brings in commercial. Obviously, there's some MA only. I know at least one of those deals is direct to payer, and then some geographic variants. I mean, I think when you take that up, does it feel like the model has shifted a little bit? I know there was a bit of a ramp from California was typically under delegated entities.
Now that you're doing a wider range of things, you know, does it feel like that's an evolution that was natural, and it should be the expectation that continues over the next, call it, 12-18 months?
Yeah, I think so. I think what we're generally seeing from payers across markets right now is just, like, a willingness to give us as much of the oncology spend as we're willing to take. So historically, for those that aren't familiar with The Oncology Institute, we would take primarily Part B, as in boy, capitated risk contracts, so managing the injectable portion of the drug spend. For sure, outside of California, almost all of our risk contracts include Part D, as in dog, so the oral specialty medications. You know, payers are asking us to take on radiation oncology risk. We do have radiation oncology centers in California, and we will manage independent practices through an MSO model in new markets, although that's a relatively smaller portion of risk premium.
But even seeing requests taking on, like, surgical oncology risk, which we haven't, you know, accepted yet. But I think, again, that just highlights kind of the top-line pressure that the industry is facing and the need to kinda manage specialty spend as much as possible and, and the sort of people just kind of, you know, really excited about any sort of solution that can provide that.
Awesome. Okay, maybe a couple things to pick at there I think are interesting. You know, you've said a couple times the pressure that you're seeing on the, presumably on the MA side, although now we're hearing about Medicaid pressure, too, but I'll stick with that MA pressure. It's obviously driving more interest.
Mm-hmm.
We're hearing it from other players in sort of non-global capitation, value-based arrangements, that the payers are looking for savings, looking to do deals to find, you know, dollars in the couch cushion, so to speak, in specialty spend. How does that actually change the conversations? Is it an acceleration of the timeline it takes from first conversation to signing paper and rolling out? Are they... It, you know, it sounds like there's a little bit of expansion of scope is within interest for them. You know, are the terms in the way that you're looking at the pricing on the deals a little more favorable? What are some of the dynamics you've seen over the last, call it, six to nine months when the pressure's really been ramping?
Yeah. I would say primarily it's an acceleration of the sales cycle. I think our model has always resonated with payers and risk-bearing medical groups. They get it, they understand the need. But I think, like, 2020 to 2022, there was so much focus on risk adjustment and kind of revenue and just, you know, putting dots on the map for those entities that while they loved what we did, it was just kinda fell lower on the list of priorities, and that's now moved up to, you know, priority one, two, and three is like how do we take our now, you know, constrained P&L with top-line pressures and manage specialty cost trend trends? So it's definitely accelerated the sales cycle for us in a major way.
I wouldn't say necessarily that it's changed pricing that much, 'cause generally, we price against benchmark spend, and that varies by product and by market, in terms of how we price contracts. But, for us, it's allowed us to be, I think, for the first time ever, like, really choosy in terms of, you know, deals that we're taking on and making sure that we get sort of the right construct to, to make them, you know, as, as beneficial as possible for TOI and our investors.
Mm-hmm. Okay, and then, you know, maybe one more. All, all these new contracts rolling on, there's a lot of new revenue coming through, which is great. When you think about the margins and the process of onboarding a contract, as far as accruals go, what does that look like? Is there, is there margin from day one? Is there... Or, or are you more conservative on the front end with how you accrue it, and then over time, as you start to see utilization come through and claims come through on those, you know, you start to sort of true up versus a conservative benchmark? What's the approach there, generally?
Yeah. Generally, the tailwinds whenever we start a new capitation contract, especially in existing markets, is obviously, it's prepaid revenue, right? So, in the early days of a contract, we do our best to minimize leakage, and we do that several months in advance of the contract, starting by working with referring PCPs and specialists to see patients on a fee-for-service basis and drive down the leakage that occurs after a contract starts. And then those early months, again, you know, typically are very margin favorable for TOI. And they continue to be, it just over time, as the contract kinda hits steady state, so to speak, where you know, there is that claims catch-up, we sort of hit our steady state for a cap margin.
Got it. Okay. Really, really interesting. Maybe the last one on this topic, but as you think about, you know, lots of new contracts coming on, you also announced that there's gonna be one contract you're exiting later this year. How does that sort of come about, or what's the genesis of that? Is it simply, you know, the rates and the utilization in that market, or the benchmarks make it so there's no real pathway to profitability? We've heard about that on, you know, some of the global, you know, PCP cap companies saying similar things, where this is just a market or a payer contract that we couldn't see getting profitable on. You know, what does that look like, or sort of what's the explanation for that one contract in particular?
Yeah. That specific contract, I mean, it's in a legacy one of our legacy markets, California. You know, that market is very far along on sort of managed care journey and has been capping specialty for decades now. So we actually have regional competition in that market and compete a lot on price. We generally out-compete on service, but, you know, certain contracts hit a point where, again, pricing is so competitive that, you know, sometimes we'll lose those. And the good news is, I think there's so much opportunity outside of California, and even within California, there's some high-value partnerships that, you know, we're seeing that net growth, despite, you know, having some turn on our legacy contract base.
Got it. And as that one rolls off, is it fair to expect there to be a little bit of earnings lift from it, or is it more that prospectively, when you looked forward at the next cycle and versus the competition and other bids, you didn't see really a pathway forward there?
Yeah. So it's, it's a little bit frothy because we have a bunch of new contracts starting as well.
Mm-hmm.
So just if you think about our overall capitated book of business, we're seeing kind of lift quarter-over-quarter, and that's why we changed the metric of PMPY on our earnings to just sort of message and be able to drill down on a market-by-market basis for investors, kind of the progress in our expansion of our capitated business, versus just talking about lives in general. So that contract will roll off towards the end of Q3, where we have a bunch of new contracts starting, and then some additional opportunities in Q4. And so we'll try to provide as much visibility in terms of what that's doing to our capitated portfolio, kind of quarter by quarter.
Got it. Okay, and actually, you know, maybe one more on this, just you sort of alluded to it on, you know, higher MA exposure in some of the new markets you're getting into. I think your rev PMPMs overall for capitation are in, like, the $40 range right now.
Mm-hmm. Mm-hmm.
How much of a step up do you get on a per-life basis in MA, and, and generally speaking? You know, are we talking 2x-3x, or is it higher? Reasonable utilization is much higher, but just interested to get it-
Yeah
... quantifiable there.
Yeah, it's a great question. I mean, it's, it's really... It's pretty amazing, actually. So, you know, California, generally, we see MA utilization in kind of like the $20, low $20 range. Outside of California, we're seeing benchmark oncology MA utilization, sometimes $80+, up to even we've seen some regions are, like, over $100. So when you think about that, that's important for a couple reasons. One, obviously, it, it is tremendously valuable for us to have new partnerships outside of California, just based on that lift in rates. Even if we're providing, you know, 25%-30% savings, it's on a much higher portion of spend.
and two, it just highlights the urgency, because if you think about that in the context of what total kind of risk premium would be for a primary care group on an MA Live, you know, you're talking about, you know, 8%-11% of total spend on oncology. So any solution that can provide, you know, 25%-30% improvement in spend, you're talking, you know, several hundred basis points in MLR improvement for those groups.
Yeah, okay. Really interesting. And maybe, maybe tying that back, I mean, for years, I feel like part of the thesis was you look at markets like Florida or Texas, where, you know, there's a really large dominant or one or two really large dominant, predominantly fee-for-service oncology practices, and their rates are very high, and they sort of have the market cornered, but that, that has an influence on the benchmark overall. Does it feel like that's been the case as you've entered the markets, when you actually get in the contracting cycle, that that sort of impact is there, and that explains some of it, or is it- is it true utilization that's different, you know, versus a California market, when you see the difference in benchmarks?
It's both. It's a function of utilization, like on an actual prescribing pattern basis, being much higher. Then there's also the function of just rates being much higher-
Mm-hmm
... because those entities generally aggregate market density and drive up payer rates. So there's both the, the rate impact as well as just the prescribing pattern impact. And I think the, The really great thing is the, the, the TAM for oncology is massive, right? So it's gonna be many, many, many years before we start seeing that benchmark meaningfully come down due to TOI or any sort of follow-on assets that look like TOI coming into the market and kind of managing spend. It's just so wide open right now and will be for, for some time.
Got it. And then maybe one, and this sort of pulls back. We're here at this conference, we were just talking about it, lots of biotech companies, lots of new drug introductions. You know, one question we've gotten over, you know, plenty of years has been: how does that get rolled into your contracts, right? A new drug comes live, are you on the hook for it, or, or how do you sort of contract your structure for that?
Yeah, definitely. So we've got a fantastic med econ team, and so we price in based on historical trends, either a fixed escalator to account for chemotherapy cost trends into our cap contracts, or we'll just peg an FDA carve-out date and not take forward-looking risk on certain drugs. The former, sort of, strategy is more common now because it just creates a more frictionless experience with our partners.
Mm-hmm.
They just have sort of that fixed sort of pricing built in, that escalates each year, you know, to account for the chemotherapy cost trends.
Does that sort of account for switching costs, I would think, between-
Yeah
... drugs? Yeah. Okay.
Yeah.
Awesome. Well, a lot, a lot of time on the cap deals, a ton to dig in on there. Maybe we'll, we'll shift gears and move elsewhere. You know, I think first quarter results came in, cash flow looked great, gross profit and EBITDA were a little lower than I think some people were expecting. You know, one of the questions we're getting from investors is sort of how you take that 1Q result and then bridge, particularly on EBITDA, to the full year. I know definitely a number of one-time impacts in 1Q that we've talked through, but if you just- if you take that question at face value, how do you think about the biggest moving pieces that, that bridge you from that 1Q result to the, the EBITDA guidance that you maintained for 2024?
Yeah. It's a great question. I think by far, the biggest lever that impacted our results in Q1 was therapeutics. So there's a couple of things going on there. One is Q1 seasonality and procurement trends, which we see every year, which kind of drive down margins in Q1. But that was the sort of double whammy of that was the changes in the DIR fee methodology being applied to point of care or point of sale, rather. So that had a tremendous impact in Q1. We're already starting to see that reverse in April and kind of early months of Q2.
Mm-hmm.
And expect that to continue to improve over the course of the year back towards, you know, pseudo-normalization. So that's gonna be a massive lift on our, our margins. And then you've got the momentum of the, the new growth, that's further, like, limiting cash burn in markets like Florida. So we're standing by at, at this point, our, our guidance range. And obviously, there's puts and takes to that, but, you know, we think that the successive quarters are gonna be, you know, hopefully a lot improved.
Mm-hmm. And as you think about patient services in particular, I guess, is more of the impact that DIR coming from you on the infusion side, is that, like, the way to think about the first quarter performance, or how would you sum that up?
Yeah, yeah, DIR, I mean, primarily actually on Part D side.
Mm-hmm.
So that was, yeah, primarily impacting us in Q1, and we had a fairly substantial jump in our Part D sort of procurement prescribing trends in Q1 related to our California pharmacy opening, as well as just general growth in our MID. So, you know, that, you know, huge lift coupled with the DIR impact, you saw that kind of overall compression.
Okay. Maybe one more on DIR. As you think about... You're starting to see it normalizing, what does that look like? I know when we've chatted about it before, the industry chatter out there is kind of like there's one PBM that was particularly a bad actor on, on the shift. Is that sort of lots of folks coming to them and saying, "Hey, this isn't tenable," or, you know, what does that transition actually look like in terms of that improving?
Yeah, I think there's a lot of just, like, legislative pressure right now and across the industry in terms of community-based oncology groups feeling the squeeze related to this-
Mm-hmm
... and you know, clamoring for change. So I think that'll be impactful in the back half of 2024. And then there are PBM-specific differences, which will kind of iron themselves out as folks shift their procurement pathways. So yeah, I think that'll, you know... It's hard to pin, like, a timeline on that.
Mm-hmm.
I think over the course of 2024, we're gonna continue to see that group.
Right. Right. Okay, and then cash flow, we've talked about it. From my viewpoint, very strong in the quarter, especially when you take into account that the $15 million AR headwind from the Change Healthcare disruption that you guys pointed out and quantified. Does it feel like what you saw in the first quarter is sort of the right baseline to think about? You talk about moving pieces that are gonna move EBITDA up. Obviously, that Change impact is gonna swing that $15 million, but sort of excluding that from the equation, are we at the right stable run rate to think about as you advance EBITDA, that cash flow should sort of track with that off of what we've seen in the first quarter?
Yeah, that's right. So we've got a pretty disciplined target for managing our SG&A. You know, we did a big restructure last year. We're gonna continue to find ways to drive efficiency in our cost structure and our business, but we're very confident in that. You will see the swing in the Change Healthcare, so I think that it will attract to that, over the upcoming quarters, that EBITDA cash flow.
Got it. Okay. Maybe a couple questions before we wrap things up here to take a step back. I know one of the things I've noticed, and I'm sure you have, too, more on the VC side, but there's lots of sort of enablement, navigation platforms, more funding going into the space, looking at how do we address oncology specifically, and specialty spend broadly in with value-based care or through value-based contracting. What's your take on where you sit relative to some of the other things that are sort of popping up out there? You know, you've sort of got a full-service approach, the ability to have embedded providers in a given market, but also take a network stance. That versus sort of point solutions that you see.
Mm-hmm.
You know, maybe for providers or for payers. Can you talk about just the competitive landscape and, and why you feel like the model you've sort of landed on for TOI in the current version is, is the right one over the next couple of years?
Yeah, generally speaking, I think about assets in the oncology space in four buckets, and three of them are value-based, and one is sort of the opposite of value-based. So you've got, kinda the MSO models like, AON or USON that are coming in, you know, engaging with practices, you know, providing your typical MSO suite of services and then driving up, spend, and generally, they're plays on the drug procurement side of the business. Some of them are quite large. On the value-based side of the house, you basically got, what we call benefit managers, which is like a New Century or an OPN in California, which kind of sit in between the payer and independent practices, and generally provide pathway support or UM support to manage, therapeutic costs. Certainly, they're-- I mean, they can be beneficial.
They've got ROI in markets where you've got no other solution. I've worked with them in the past when I was on the primary care risk side of the house. But they're fairly limited in that they don't actually control the physicians to the same degree that primarily employed model like TOI does. You've got kinda the newer upstarts, which are more care management, care navigation platforms, and again, like, good companies. But the problem with those is that you are addressing the patient's kinda supportive care and navigation needs, which can be impactful on total cost of care, but fairly limited on the therapeutic management side of the house, which is gonna be, you know, 80% plus of your spend, and especially in the early stages of a cancer journey.
So we believe our solution is the most comprehensive. Again, employ 90% of our physicians. We do have an MSO model as well in select markets where we engage with health plans. That gives us a high degree of reliability on prescribing patterns and quality of care across our 86+ and growing locations. We do have the Embedded Care Navigation program, our High-Value Cancer Care program, which we've had for many years, which we've shown through published results, is tremendously impactful in terms of total cost of care and impacting Part A spend. And it's really more of a comprehensive solution. So, you know, again, in terms of just providing value to payers and really being able to impact spend, I think our model is the most comprehensive.
Obviously, I'm biased, but that's where I sit.
Got it. And maybe, I mean, you're a doctor yourself. As you think about engaging with the clinician, does it feel like there's a demonstrative difference between, you know, being employed and a part of an organization that tries to integrate all of these things, versus engaging with someone who, you know, maybe signed a contract with a payer and now is reaching out to you, offering some sort of tool and service, but obviously, there's an embedded interest on the other side for them, too? You know, what does that look like at the actual physician level?
Yeah, absolutely. I think that our model, the employed model is important because it completely divorces, like, prescribing patterns from financial incentives for the physician, being employed, and then we can incentivize our physicians specifically on metrics that are relevant to value-based care and to the patient journey. The problem in oncology is that, you know, for a fee-for-service practice, they're an independent, which is what the kinda benefit managers are managing, you know, 85%+ of the revenue comes from therapeutics, right? So, that's another reason why I think the employed model just makes more sense for oncology, for value-based care.
Makes a ton of sense. Maybe a couple of minutes left here. I wanna give you a little bit of space to sort of frame things out. You know, you've been very clear that the focus is on reaching cash flow and EBITDA breakeven and sort of stabilizing and getting the business on that front while continuing to grow. You've outlined four strategic pillars to try to get there. Can you talk through each one of those and how you think those need to progress over the coming quarters and years to sort of achieve that target?
Yeah, absolutely. So the four pillars are, you know, eliminating cash burn, continuing to drive four-wall profitability in our legacy markets, which are primarily in the West, and then improving our new markets, which is Florida and then Oregon in Q4. And just continuing to be a leader in value-based oncology care. So in terms of eliminating cash burn, again, I think we took a tremendous amount of cost out of the business last year. We're gonna get the full year kinda run rate impact of that this year. And then we're continuing to integrate some interesting new technologies to drive efficiencies around our central operations, which manage a lot of the patient journey around authorizations and medical records.
So, we've got a specific target on SG&A as a percent of revenue that we track to on a month-by-month basis. You know, we believe that we can, can continue to outperform there. We are growing out of kind of our early public company costs in 2024 and 2025, which is exciting. In terms of driving profitability in legacy markets, if you look at our largest market, which is California, you know, very profitable on a four-wall EBITDA basis. We are doing some things to be defensive in that market to retain our important partnerships, such as adding radiation oncology, which sets us apart from medical oncology pure plays, and continue to drive value, things like adding our pharmacy to serve Medi-Cal patients.
In terms of pursuing new markets, you know, we made a big bet on Florida and a couple other new markets two years ago, when we were first public. We've got tremendous capacity to fill in Florida, and so we're excited about all the new deals that we're signing in that market because they just—each one that we sign just, you know, brings more patients into the clinics, eliminates more of our cash burn. We believe that just with our current footprint, you know, we could double or triple the size of the company easily without putting a lot more dots on the map. So that will continue to be our focus for the next 18-24 months.
Awesome. Really great. Thanks again, Dan. It's great to sit down with you, as always.
Yeah, thanks so much, Jack.