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Hello, and thank you for standing by. Welcome to InnovAge Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would like to hand the conference over to your speaker for today, Ryan Kubota, Investor Relations. You may begin.

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge fiscal 2023 second quarter earnings call. With me today is Patrick Blair, President and CEO; and Barbara Gutierrez, CFO. Dr. Rich Feifer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market closed, 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, February 7, 2023, 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 fiscal second quarter 2023 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, Florida de novo centers, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that 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 annual report for the fiscal year 2022 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscal second quarter 2023. After the completion of our prepared remarks, I'll open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I want to begin by expressing my gratitude to my InnovAge colleagues for everything they're doing to support our businesses, our communities, our participants who are a daily reminder of our higher purpose, and each other. I'd also like to share my appreciation for the investors who have stuck with us through a very challenging period. On behalf of all InnovAge employees, thank you. A lot has happened in the last 16 months. We have simultaneously navigated a pandemic and its associated disruptions, as well as federal and state compliance related enrollment restrictions. In Colorado and Sacramento, California. It is with great enthusiasm and responsibility we begin the next chapter at InnovAge. As you may have seen in our press release on January 23, we have been released for sanction in the State of Colorado by both CMS in Colorado's Department of Healthcare Policy and Financing, which represented approximately 44% of our total census as of December 31. Although it has been an extraordinarily challenging 16 months, we've spent this time rebuilding the foundation of our business to improve standardization, quality, and compliance in each of our centers. We have added staff and meaningfully upgraded talent across the organization and expanded our compliance capabilities, applying the audit lessons every day at every center. We have invested in tools and technologies to help our employees function more efficiently, effectively, and compliantly. Culturally, it has brought us together as one team, which we refer to as One InnovAge and are committed to a mindset of continual improvement to which we are holding ourselves accountable. The release of the sanction in Colorado is both the end of a difficult period and the beginning of the next chapter in this company's bright future. Simply, we are a different company than we were 16 months ago. And while our focus on compliance won't change, we're poised to help even more seniors with safely in an independent setting, as long as possible. And now more than ever, we believe there are meaningful tailwinds for the PACE model of care nationally. Over the last 15 years, we've seen rapid growth in managed Medicare plans in value-based primary care centers, the best of which make use of a sophisticated primary care model and care management strategies. However, the front-end of the baby boomer population is now approaching the average age of PACE participants, which is about 77. We believe this population will require more intensive coordinated community based geriatric model of care that combines the best of both Medicare and Medicaid services like PACE. All that said, our focus in progress remained consistent with what we shared last quarter. And my comments today will encompass a regulatory update, focus areas in progress, and perspectives on the quarterly financial performance. I want to begin the regulatory update by acknowledging and thanking our government sponsors for the continued partnership and solution oriented approach as we work through the sanctions together. They have rightly pushed us on our thinking and on our commitment to ensure that compliance remains at the forefront as we resume growth in Colorado. As I've shared with them, we are committed to responsible growth and we will remain vigilant to ensure that our rigorous compliance focus remains bedrock. As discussed in our press release, we have been released from the enrollment sanctions in Colorado by CMS and the state agency, which means we are free to begin enrolling new participants. Practically speaking, we don't expect to see our first new enrollee in this market until March. In conjunction with the sanction release, and as is typical in processes such as these, we will still have corrective actions to fulfill in post sanction monitoring requirements, including an annual audit conducted by the state for the next couple of years. Regarding Sacramento, recall we were released from the enrollment section by CMS in late November 2022. We continue to await word from California's Department of Healthcare Services and expect resolutions soon. Though we expect to continue to work closely with our state and federal partners in existing markets, we also believe the conclusion of these formal audits is a meaningful catalyst for us. In addition to reopening organic growth in Colorado, it brings us an important step closer to opening our existing de novo sites in Florida reengaging with other states or de novo opportunities and becoming more intentional on the execution of our growth strategy, which we've been able to refresh during this period. Our compliance commitments to CMS and our state partners go beyond our existing centers. We are committed to bringing this dedication recent investments in technology and operations and lessons learned in each center and state going forward. We believe that we are the only large multi-state paced program that has gone through such an expansive compliance audit and we're better for it. Frankly, we believe it should strengthen our value proposition to new states and potential partners and it has positioned us to be a more thoughtful acquirer in the future. Consistent with my remarks last quarter, our number one near term priority is responsible growth. And I can't express how enthusiastic we are to be at this inflection point. The hard work continues now as we shift our focus from closing important compliance gaps to achieving operational excellence and delivering consistent responsible, profitable growth. Our action plan for accelerated growth margin recapture in sustainability as five dimensions. First, increased same center and de novo enrollment growth rate over historical levels. Two, increased revenue per participant through more effective rate setting discussions to ensure fair rates based on actuarial soundness, and ensuring our [risk scores] [ph] accurately reflect the acuity of our population. Three, strengthen payer capabilities to better manage utilization and external provider costs. Four, run center operations more efficiently and effectively. And five, enhance discipline at the corporate level to better leverage our fixed cost base. Starting with same center growth, I wanted to take a moment to highlight where we sit at this moment regarding center capacity. We currently have 6,460 participants across 18 centers as of December 31. While the growth runway varies by center and market, in the aggregate, we have embedded capacity of almost 50%. Job 1 is to start filling this capacity responsibly. We have used this time under sanctions to improve our marketing messages and educational content, expand our go-to-market channels, train in onboard high caliber enrollment talent, redesign our compensation plans, and add new referral channels to expand our access to eligible seniors. Restarting growth in Colorado and accelerating growth in other markets will be a dial, not a switch, meaning we expect it will take a few months to ramp up our enrollment teams, marketing partners, and new referral partners before hitting our stride. Switching for a moment to de novos. Our two Florida centers have the capacity to serve 2,600 participants combined and the capital investments behind us. With the sanctions lifted, we are ready to resume the application process to become operational. Though it is still too early to comment on the exact timing of opening, we expect to begin the administrative process this quarter and aim to be operational, as early as possible in fiscal year 2024. Next, we're focused on ensuring premium readouts we'll see for each participant. Like Medicaid managed care plans, we are more of a price taker than we are a price center. While rate methodologies vary by state, in general, states determine how much they would have paid for our participants if they were enrolled in an alternative Medicaid program. And then establish a pace rate that reflects a discount from what they would have otherwise paid. We need to improve at this actuarially driven process to ensure we can partner effectively with states and that we're paid a fair amount that reflects the true cost we've been experiencing caring for our participants. We're already making great progress and plan to continue expanding our talent in preparation for the next rate cycle. The second dimension is ensuring our Medicare risk scores accurately reflect the acuity of our population. This is an area we have focused on over the last six months and I'm very pleased with the progress we've made. I believe our risk scores have lagged the underlying acuity of our population, particularly since the onset of COVID, and we're working hard to document all Medicare risk adjustment factors more completely and accurately. We have already executed on process improvements, which have increased our chronic condition recapture rates. As it relates to strengthening our payer capabilities, I continue to believe that we have a big opportunity to leverage the fundamentals used by the best managed care payers to improve quality and to lower the total cost of care. We're coming at this from both the utilization and unit cost perspective. On the utilization side, we're taking steps to avoid unnecessary hospital admissions and readmissions and reducing skilled nursing facility admissions and length of stay by delivering more care in the center or the home. We are also refining our claims payment project to identify overpayment opportunities that represent lost money that can be recovered and avoided going forward. On the unit cost side, we're reviewing the size and composition of our external provider network relative to the needs of our population to ensure we balance the mutual goals of access to quality of care with network cost efficiency. The near-term impact within our portfolio of clinical value initiatives or CVIs as we call them is only a few million dollars today. And while each of these initiatives will individually be additive, collectively, we believe they will become much more material with time. While we expect it will take a year more for this capability to mature, it is critical that we develop these muscles systematically as sophisticated managed care organizations do every day. You may recall that we identified 10 areas of operational excellence that were foundational to our success in resolving the audit deficiencies. I'm pleased to report that we are near complete with these initiatives and they have driven a strong improvement in participant experience and employee productivity, but we are by no means done. We will approach operational excellence with the same continuous improvement mindset that we are applying across the business. Recall, we made a conscious decision to retain and even augment our participant facing staff in sanctioning markets, despite census in those markets declining roughly 20% relative to December of 2021. During this period, we invested in hiring additional staff at the clinical and local leadership levels to ensure that we emerge from sanctions stronger and retain the staffing capacity to serve more participants. We expect to grow back into this excess capacity, but it's going to take some time for us to fully understand and have confidence in a new baseline for center level cost structure and contribution margin. As growth increases post sanctions, we plan to redouble our G&A focus and discipline going forward. In particular, expect us to be intentional about achieving leverage over fixed cost. I anticipate our corporate headcount to look very similar for the foreseeable future as we scale the business. Additionally, there are several tools we are leveraging to help the centers become more efficient and more productive. The most prominent example is our recent implementation of the first ever PACE specific instance of the EPIC electronic medical record. Now live in two Virginia centers with the remaining Virginia and Pennsylvania centers expected to be live by the end of the quarter. We anticipate full implementation across all our sites in the first half of fiscal year 2024. As mentioned last quarter, this is the most important technology investment in our company's history and we're very enthusiastic about the clinical and financial value this will unlock over time. We believe EPIC will be a cornerstone to operating more efficiently, ensuring standardized compliant processes at the point of care, and capturing the clinical information needed to deliver more targeted interventions. We expect these five focus areas: enrollment growth, revenue per participant, payer capabilities, center operations, and corporate costs, which we call our five to drive, to be key drivers of earnings growth moving forward. Now turning to the quarter, we reported revenue of $167.5 million, a sequential decline of approximately 2.2%, compared to last quarter, driven by census attrition in Colorado and Sacramento, which together represent approximately 45% of our total census. We ended the quarter serving approximately 6,460 participants. For the second quarter, we reported center level contribution margin of 22.6 million, and a corresponding center level contribution margin ratio of 13.5%, compared to first quarter fiscal year 2023 center level contribution margin of 21.4 million, an increase of $1.2 million. As expected, the current quarter's financial performance is unremarkable. The inability to enroll in almost half of our center portfolio coupled with the intentional investments we've made at the centers has pressured both our margins and growth. However, we believe strongly this financial moment is more reflective of the conditions behind us than in front of us as we begin the exciting work of serving more seniors. It is worth emphasizing that growing participants within our existing centers from currently depressed census levels will have two primary disproportionately accretive impacts to the bottom line. It will first employ the slack capacity. As I noted earlier, given the current census levels at approximately 50% of potential capacity, each incremental participant will drive center level contribution margin above our overall average and this will be true until we reach our optimal staffing ratios, which we don't expect to reach until sometime in our next fiscal year. Additionally, you'll recall that I stated we want our participant risk mix to mirror the communities we serve. A second order impact of the sanctions is that our risk pool has become [frail with] [ph] time as we've been unable to balance it with newer healthier members. We anticipate that as the participant composition naturally [rebalances] [ph], we'll see our participant expense improve. In closing, I'm extraordinarily proud of the team and the work we've accomplished to enable us to control our own destiny going forward and to continue to pursue our mission. It is responsibility we assume with the utmost seriousness and focus. That said, our journey in the worthwhile hard work ahead has just begun. I'm more energized than ever to expand pace to the many deserving seniors in need who would benefit from this amazing program. I know we will continue to work tirelessly to execute on the strategies discussed and to unlock the full potential of this great organization. Now, I'm going to turn it over to Barb.

Thank you, Patrick. I will provide some highlights from our second quarter fiscal year 2023 performance and some insights into the trends we are seeing through the first half of fiscal year 2023. As with our previous earnings calls, I will refer to sequential comparisons relative to the first quarter in order to provide a more meaningful picture of our performance. As of December 31, 2022, we served approximately 6,460 participants across 18 centers. Compared to the prior year period, this represents an ending census decrease of 8.4%. Compared to the first quarter of fiscal year 2023, this is a decrease of 1.2%. We reported approximately 19,470 member months for the second quarter, an 8.1% decrease over the prior year and a decrease of 1.4% over the first quarter of fiscal 2023. Compared to the second quarter of fiscal 2022 and sequentially, the enrollment freeze in Colorado had the greatest impact on member months and census in the second quarter. In our non-sanctioned locations, ending census grew 5.1% over the prior year period and 1.7% over the first quarter. Total revenue declined by 4.5% to $167.5 million, compared to the second quarter of fiscal year 2022. The decrease is primarily due to lower member months as a result of the ongoing sanctions, partially offset by an increase in both Medicaid and Medicare rates, net of the full reinstatement of sequestration in July 2022. Revenue declined by 2.2%, compared to the first quarter of fiscal year 2023, primarily due to a decrease in member month associated with the sanctions, coupled with a decrease in Medicare Part D revenue commensurate with pharmacy rebates received during the quarter. Due to the nature of the Part D program, this decrease has a negligible impact on pharmacy margins and center level contribution margin. External provider costs were $93.5 million, a 2.7% increase, compared to the second quarter of fiscal year 2022. Similar to last quarter, the primary driver was increased cost per participant, due to increased assisted living, and skilled nursing facility unit cost and utilization. As discussed in the past, de conditioning of our participants has led to higher rates of long-term placement coupled with increased unit costs as mandated by certain states. Sequentially, external provider costs decreased by 2.8% as a result of lower census, due to the ongoing sanction and lower per member per month pharmacy expenses, due to rebates as referenced earlier regarding Part D revenue. Our cost of care, excluding depreciation and amortization of $51.4 million was 19.7% higher than the second quarter of fiscal year 2022. The primary cost drivers include the following three items: One, salaries, wages and benefits, which accounts for over 60% of the total variance, increased to higher headcount as a result of selling key vacancies, higher wage rates, and increased labor costs associated with ongoing audit remediation and compliance efforts. Two, third-party audit and client support as we work through the audits in our sanctioned markets and proactively continue to perform self-audits in our non-sanctioned markets. And three, fleet and contract transportation driven by higher average daily attendance in our centers, an increase in external appointments and higher fuel costs. Cost of care decreased by 4.1% over the first quarter of fiscal 2023, primarily due to the higher than expected use of PTO during the holidays and lower building repair and maintenance. Additionally, from an overall staffing perspective, we have seen modest improvement with net new hiring declining quarter-over-quarter and we believe incremental staffing costs for our existing centers have largely plateaued. Center level contribution margin, which we define as total revenue less external provider costs and cost of care, excluding depreciation and amortization was $22.6 million for the second quarter, compared to $41.4 million in the second quarter of fiscal 2022 and $21.4 million in the first quarter of fiscal 2023. As a percentage of revenue, center level contribution margin for the first quarter was 13.5%, compared to 23.6% in the second quarter of fiscal 2022, and increased from 12.5% in the first quarter of fiscal 2023. Our second quarter margin performance continues to reflect the transitory state of the business under sanctions. With the sanctions in Colorado now lifted, we expect to see margins begin to normalize over time as we resume participant enrollments in Colorado and grow into the central level staffing capacity that we have invested in through the audits. The census growth will also improve participant mix and re-balance the risk pool, which will offset the higher average cost of longer tenure, higher frailty participants. Additionally, as our clinical value initiatives or CVIs develop over the coming quarters, we anticipate a reduction in external provider costs as these initiatives mature. Sales and marketing expense was $3.8 million, a $2.9 million decrease, compared to the second quarter of fiscal 2022. The decrease was primarily due to lower marketing spend and headcount count as a result of the sanctions, as well as the reduction in sales commission expense, due to the deferral of commission expense in accordance with ASC 606. Compared to the first quarter of fiscal year 2023, sales and marketing expense decreased by approximately $600,000, primarily due to the deferral of commission expense mentioned previously. Corporate, general and administrative expense was $28.8 million, an increase of $300,000, compared to the second quarter of fiscal 2022. The increase was primarily due to one, an increase in headcount to support compliance and bolster organizational capabilities; two, third-party costs associated with implementing core provider initiatives, expanding risk bearing payer capabilities, and strengthening organizational depth, including the transition to EPIC, which was successfully deployed in two of our Virginia centers during the quarter; and three, an increase in software license and maintenance fees. These increases in costs are partially offset by a reduction in bad debt in the second quarter of fiscal 2023 and executive severance and recruiting costs that we incurred during the second quarter of fiscal year 2022. Sequentially, corporate, general and administrative expense decreased $1.4 million, primarily due to the tapering of certain third-party consultant expenses associated with laying the groundwork for strengthening organizational capabilities and a reduction in bad debt expense. These decreases were partially offset by an increase in costs associated with the EPIC implementation and legal fees. Net loss was $10.5 million, compared to net income of $1.1 million in the second quarter of fiscal 2022. We reported a net loss per share from the fiscal second quarter of $0.07 on both a basic and diluted basis. Our weighted average share count was 135,578,888 shares for the second quarter on both a basic and fully diluted basis. 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 a negative $2 million, compared to $14.8 million in the second quarter of fiscal year 2022 and negative $3.8 million in the first quarter of fiscal year 2023. Our adjusted EBITDA margin was negative 1.2% for the second quarter, compared to 8.4% for the second quarter of fiscal year 2022 and negative 2.2% for the first quarter of fiscal year 2023. The sequential quarter-over-quarter improvement in adjusted EBITDA and adjusted EBITDA margin is primarily a function of reduced cost of care, the deferral of commission expense, and a net reduction in corporate G&A. 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 start-up ramp through the first 24 months of De Novo operations were $845,000 for the second quarter, primarily related to centers in Florida. Turning to our balance sheet. We ended the quarter with $99.5 million in cash and cash equivalents after deploying $45 million in short-term investments to take advantage of rising interest rates. We had $84.6 million in total debt on the balance sheet, representing debt under our senior secured term loan, plus finance lease obligations, and other commitments. For the second quarter ended December 31, 2022, we recorded cash flow from operations of negative $35.1 million and we had $7 million of capital expenditures. Finally, with the enrollment sanctions in Colorado lifted and we begin to focus on responsible growth and margin expansion, I will provide some additional visibility around the following trends we are seeing as we head into the second half of fiscal year 2023. Regarding revenue, effective January 1, we experienced a low double-digit Medicare rate increase associated with an annual increase in county rates coupled with an increase in risk scores. This positive outcome is tempered by notification from the state of California that Calendar 2023 rates will experience a low-single-digit decrease. We believe these rates do not consider post-pandemic cost trends and we have requested the state revisit their rate setting methodology. Regarding census, we are pleased that the Colorado sanctions have been lifted and have immediately restarted our enrollment efforts for new participants. As a reminder, we suspended all marketing activity in Colorado and Sacramento as a condition of the sanctions and participants can only enroll in pace at the beginning of each month. As a result, we anticipate it will take a few months to fully ramp up our enrollment levels as we responsibly restart the enrollment process. As Patrick indicated, we have additional physical capacity in each state for new participants. With existing [census alone] [ph], excluding our two Florida De Novos, we have physical capacity to more than double our current census. For example, in Colorado, we have the capacity to add approximately 1,900 new participants over time or a 40% increase from our current census. Additionally, we are also excited to re-engage with regulators and resume the application process in Florida, where our two new de novo centers in Tampa and Orlando have the combined capacity to serve 2,600 participants. Similarly, as we start to ramp up enrollment, we expect that margins will begin to expand following the last several quarters of contraction. We believe that staffing, operational, and technology investments we have made across the organization in the last 12 plus months will allow us to grow into our operating structure without adding a significant number of new FTEs. Additionally, we continue to believe that there is room to reduce some of the temporary costs associated with the audits in the future. Finally, some saw some cost of care, external provider costs and overall center level margins. As we move forward, we continue to believe that we can obtain margins similar to what we experienced before the sanctions, although the composition of our center level costs may look slightly different going forward. The investments that we have made, particularly in staff related costs, have elevated our cost of care expense compared to historical levels, but we are driving value through other focus areas, such as our payer initiatives and CVIs to bend the cost curve and deliver margin over time. Though it will take multiple quarters to return to expanded margins, our focus will be on the margin drivers. Specifically, accelerating census growth which serves to rebalance the participant risk pool, as well as to optimize staffing ratios, reducing temporary costs associated with the audits, and executing on clinical value initiatives to improve participant care and reduce unnecessary costs. In closing, we are excited to be entering a new chapter and extremely proud of the hard work and accomplishments of our team over the last year. We believe InnovAge is now stronger and more competitive as a result of the commitments we have made and we look forward to expanding access to pace to the many seniors who could benefit from the program in the future. Operator, that concludes our prepared remarks. Please open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Jason Cassorla with Citi. Your line is open.

Great. Thanks. Good evening. Just with the Colorado sanction lift, I was hoping you could delve a bit deeper on your expectations for the ramp and census in those centers after March. And perhaps just in context of your commentary around responsible growth, if there are any barriers or nuances that could impact the ability to ramp census growth? And then just in context of the entire entity, it sounds like census might not sequentially grow until closer towards the end of this fiscal year, but any incremental commentary on census growth expectations and timing would be helpful. Thanks.

I'll start and then have Barb follow-up. Thanks for your question, Jason. In terms of growth, responsible growth in Colorado, what I would say is, we're well-positioned to begin growing our census there. We've got – our new enrollment team is in place and we are starting to engage our referral channels, as well as our local marketing activities around referral channel optimization, referral channel management. And so, we continue to feel good that we've built awareness for the program and we've got our team in place. And we're ready to start enrolling. It's a little bit too early to say whether we have significant pent-up demand in the market. We've enjoyed strong relationships in Colorado for years. And as you'd expect, we've got a lot of organizations that have viewed us as a resource and they're now excited for us to open our doors again. And I'm hearing from the team that we're starting to see interest start to [bout] [ph] in the market and – but it's still little too early, I think, to have confidence that it's better or worse than expected. When we think about the growth going forward, I just think overall the company was doing a little north of 10% annual revenue growth, and I think as we look over the rise and we think that's a fair target for us to shoot for. I'll let Barb comment further.

Yes. So, not a lot to add. Hi, Jason. I think while we're not giving guidance, but I think it's fair to say that with this ramp of 90 days once we, kind of get through that ramp in our largest market, which is about half of our business that will be the point at which we start growing again. So, we think it will happen at the end of that 90 days.

I'd probably add, Jason. Just – Jason if you think about what has to happen now that we're right to begin and rolling again, we've got to ramp our staff up. We've got to get our referral partners, sort of back into the swing of providing us with leads of individuals that could be great fits for the program. And then it just takes time for, sort of our marketing to make its way out through the market that we are resuming growth and that we are interested in taking on more participants. So, I think it's going to take a little time and I think by the next time that we talk, we'll have a better idea of just how quickly things are going to ramp up for us.

Okay, got it. Thanks. Maybe just switching gears for a second here, I wanted to ask about rates. Maybe just a quick clarification, Barbara. Did you say that a low-double-digit Medicare Advantage rate to begin? And then just more so on the 2024 proposed MA rates, those have come in a bit lower than expected versus the past couple of years. I guess, can you just help give a barometer on what you would expect a realized rate would look like if the proposed rate comes in as finalized. Just any color around 2024 MA rates at this point? And then just, sorry, quickly another one here. Just on the state side, Patrick, given your comments, your prepared remarks on Medicaid rates, can you just give us an idea what the differential is between where your Medicaid rates are coming in right now versus where you believe it could go on a more appropriate basis? Thanks.

Yes. So, I'll get started, Jason. So, yes, just to clarify, so for calendar year 2023, so Medicare is on a calendar year, we did say low-double-digit increase. So, we have for calendar year 2023, we have a nice Medicare increase. So, that's clarification there. And for calendar year 2024, you're right, the preliminary rates for MA were pretty low and pretty disappointing. I think it was net of just over what percent, you know net of risk score and star ratings. Our first read on that is our rates are in the same zip code. So, disappointing for us as well, but that's the first read on it. It's very similar to the MA rates. Related to the state rates, I'll start and then Patrick can weigh in. So, one of the things that we're trying to emphasize for example is the cost. There's a delay in our state Medicaid rate setting in terms of the data that's used to set the rates. And so, one of the things we're trying to really work on and work with the states on is to really identify our current cost trends relative to historical data that they're using to separate. So, I referenced California for calendar year 2023. They're using data from 2019 and 2021 to set the 2023 rates. And so, one of the things we're going to work on – try to work on with them is to really demonstrate the current cost trends, which were not reflective in 2019 and 2021. So that's an example of the things we're trying to work.

Yes. I'll just reinforce, it's probably a little too early because we're studying our own data right now, but just to reinforce a couple of things that we're going to be looking for in this next round of rate discussions. First, it's really important that our distribution of our participants between those that are living in their own home versus those that are in some form of supportive housing, you know we want to make sure that mix is taken into account as we work on our rates together with our states. So, if we see more people that are in assisted living as an example, we want to be sure that that's recognized and how the rates are set versus more of a general community rating assumption. And then second, I think what Barb was saying is just doing everything we can to ensure that we're factoring in our most recent experience. PACE is a unique population and with the impact that COVID has had on the population, you see a much accelerated acuity, these individuals. And so we want to make sure that recent experience is really captured in the rate setting process. And then lastly, I would say, we want to make sure that we're really caring for the inflationary factors that we in all pace programs are dealing with, whether it's supply, salaries, wages and benefits, gas costs from transportation. I mean, you know this well, there's a lot of inflationary factors that we need to have the dialogue about how those factored into our rates. And based on some conversations I've had with some state officials, they're very interested in understanding what those inflation factors are. So, I think all-in, we got to get a lot better at this. It's very actuarially driven and we're going to put our best foot forward here in this next rate cycle.

Got it. Great. Thanks for all the color.

Thank you. Please standby for our next question. Our next question comes from the line of Lisa Gill with J.P. Morgan. Your line is open.

Thanks very much. Good afternoon and thanks for the commentary. Barb, I understand you're not prepared at this time to give guidance, but as I think about the EBITDA loss in this quarter and then I think about the next several quarters. Can we maybe just maybe understand maybe some of the puts and takes? Patrick just talked about salary wages, you talked about that in your comments as well. Third party audit and support, I would think that that's going to start to decline. You said fleet and contract transportation costs, it looks like gas prices have somewhat stabilized. Sales and marketing, I would expect that that's probably going to ramp up as you start to go back out and put sales back out there in the Colorado market and hopefully in Sacramento as well? And then lastly, you talked about de novo being $845,000 loss. So, just when I think about those kind of puts and takes this quarter, is that something similar to what we should see in the next several quarters? Is there something you would call out that would be higher or lower? Just any direction you can help us to think about this would be really helpful?

Sure. I think there are several factors we say, you know obviously, growth in and of itself will be helpful to that. So, in and of itself growth will be helpful. It will also be helpful from the standpoint of improving our risk pool, you know just balancing our risk scores. So, they are [not having] [ph] an effect on those external provider costs, which have been running higher than historically for a couple of reasons. One, the long-term impact of the pandemic, the imbalance risk pool, etcetera. So, it will have an impact on that as well. As well as our clinical value initiatives are also targeted at those external provider costs. We've talked about the fact we have elevated SWB because we have invested, we filled critical gaps, and we've done investing at the center level and retained that staff, despite losing in Colorado on average 2% of the census a month. So, it'll have a disproportionate impact to the center level contribution margin and EBITDA once we can start adding some expenses there because we won't have to add staff at that same rate. So, those would be some of the puts and takes. Yes, we'll have more sales and marketing, but there's a good correlation there to the revenue. And as Patrick said, we don't anticipate having to ramp up G&A. We really just want to leverage the G&A structure. So, I would say those are the – there's several puts and takes. Hopefully, that's helpful.

So, if I think about the roughly 2 million adjusted EBITDA loss in this quarter was materially better than what I think we in the Street were looking for, is that kind of a good baseline to use over the next several quarters?

Not commenting on the specific numbers, I think a couple of things. It's an improvement over Q1. And so, we're positive about the trajectory that we're on Q2 over Q1. And as we continue to grow, again, we think that it will be marginally dropped disproportionately to the CLCM [ph] and the EBITDA margin. So, I guess I would say, future quarters should drive us proportionately.

Yes, I would just summarize it. The growth is, sort of everything right now. Growth is really going to help bring a lot of our ratios, sort of in the balance. And we do expect a positive trend from this past quarter going forward. I think the exact, sort of rate and slope is going to depend on a number of things. It's going to depend on how many new participants we enroll. It's going to depend on the speed at which we can grow into that capacity. And that's dependent on, sort of what's called the post audit, sort of baseline that we have to find, but as we add new participants, we think that the overall frailty of the population should come down on balance and that helps with our leverage. We need to drive center attendance up. As we drive center attendance up, we can get more eyes on the patients and hopefully have an impact to the cause. And then we put a lot of operational efficiency initiatives in place that should yield some dividends as well. So, I think there's – part of the reason we just need a little time is to really understand how all these factors are going to work together. And I think overall if we can grow the business as we anticipate, we should see a positive trend in earnings moving forward.

Okay, great. And Patrick, I appreciate that you're not prepared to give guidance. How should I think about this though? Will it be that once all the sanctions are gone, maybe next quarter we'll think about guidance or is this something that we should think you'll give us guidance for 2024, I'm just curious how you're thinking about it internally?

Well, we're still having that discussion internally. As we said, we really want to have a bit more time to see the baseline on our costs and how quickly our growth ramps up, but I would say that, generally speaking, guidance in fiscal year 2024 is more likely. And we certainly want to provide the guidance as soon as we can, but at the same time it's going to take a bit of time just to understand all the held pieces and parts fit together. I feel like we're going to get more confidence on revenue probably sooner than maybe some of the EBITDA side. And so, we'll look at this in pieces.

Great. Thanks for the comments.

Thank you. [Operator Instructions] Our next question comes from the line of Jamie Perse with Goldman Sachs. Your line is open.

Hey, good afternoon. Congrats on getting to lot of these audits. I know that was a big lift. First, just on the risk pool and adding some new patients that are lower risk than your average today. Can you help us think about what the margin impact of that looks like? Are lower risk patients actually better margin or just any color you can give on how to think about the risk pool moving down impact on financials?

Yes. Hey Jamie, it's Barb. Yes. So, we do know through the course of history and through our analysis that as participants progress in their tenure with us, the cost is higher because they typically end up in higher cost settings and they're more frail. So, as they progress over time, the cost per participant in that longer tenure, the longer tenure cohorts is higher. So that's what we mean by bringing in the new level to the risk pool because the cost on the front-end of the cohorts typically is lower. And so, that's what we mean by that.

Yes. Let me just add, one of the key factors in understanding how new membership is going to impact the overall cost is the setting that they're living in. So, obviously, we want a balance of participants that mirror what we find in the community as it relates to the percentage that are in their home versus the percentage that are in the living facility versus the percentage that are in your [permanent staff] [ph]. So, that plays a factor as well in understanding our cost, how they're going to behave. And so until we have a little more time, have seen what the profile is of the new enrollment, it's going to be difficult to predict exactly what the impact is going to be to our overall cost. Yes.

Okay, great. And then you guys have been talking about becoming more like a payer over the last few quarters and you spoke about the clinical value initiatives this quarter, I'm just curious now a few quarters in, where are you more incrementally confident in your ability to drive long-term external provider cost savings, what are some of the big buckets that come to mind where you think you can move the needle there?

I'll start and then we’ll let Rich weigh in on a few things. So, yes, you're right. There are really just a handful of areas buckets we're focused on. The first is around utilization and resource utilization of the population. And we've taken a lot of steps there to review everything from our payment policies that articulate what we pay and how we pay and when we pay for services. We've also spent time focused on hospital admissions, readmissions, and SNF length of stay. So, a lot of work there and I know Rich will [indiscernible] that. We've also done a lot of work around our claims payment logic, really just ensuring that our claims and our payment systems are utilizing the most up to date clinical coding edits and this ensures we're paying for services that are consistent with the latest coding guidelines. And this is one where I think we're already starting to see some opportunity and that we're capturing. An example of that could be under what circumstances would we pay for a re-admission that is soon after a discharge. So, this sort of claim logic in [claim edits] [ph] is an area that the company really hasn't focused as much on in the past, but sort of a common practice that ensures we're only paying for the services that were appropriately rendered. Risk adjustment is an area that we've made a lot of progress on since we first started talking about the payer capabilities and I'm really pleased with the work that the team has done there. We believe that the COVID has impacted the disease states and risk factors in our population more substantially than less acute populations. And when you couple that with the lower center attendance during the pandemic, it just became more challenging for us to capture chronic condition diagnosis as disease progression changed. And so, we've had a concerted effort around that and we're really pleased with the progress that we're making. And then finally, I think as this relates to our unit cost, our cost we paid external provider we're doing a lot of work really to look at the size and the composition of our network, making sure we're balancing the need for high quality providers, but at the same time making sure that we're balancing the costs of our provider networks and we're seeing some opportunity there as well. That's a little longer-term in nature to capture the opportunity because it involves oftentimes renegotiations or rationalization parts of your network that may exceed the needs of your population. So, we have a lot going on there and I think we're starting to move forward with a good pace and Dr. Feifer's leading workforce. And I'm going to ask him to pick up anything you think I missed Rich

Well, Patrick, you didn't miss much. You took the words out of my mouth. The way we think about our clinical value initiatives is in terms of four main categories. And you heard those described in different ways by Patrick, but those categories are risk adjustment, payment integrity, resource management, and then network and unit cost. And so to the question where are we seeing earlier wins, real traction? We're seeing them in risk adjustment and in payment integrity. We're seeing some improvements, payment integrity, as Patrick mentioned, things like claim audits and claims policies and rules, addressing [Modifier 25] [ph], which is something really common in the industry. So, those are already in motion. Some things that are going to take more time because they require building up more capabilities and more relationships with other providers are in the areas of resource management, for example, and in network and unit cost with contracting. In resource management, we’re talking about things like reducing hospital stays, reducing emergency visits, reducing and the like that's requiring building out capabilities for nurses to do coordination of care and having a tighter control on skilled nursing facility admissions, and skilled length of stay and all those things. So, it's all in motion, but I think Patrick you described it exactly as I would have.

Okay, great. Appreciate the color.

Thank you. Please standby for our next question. Our next question comes from the line of Madeline Mollman with William Blair. Your line is open.

Hi. This is Madeline Mollman on for Matt Larew. I was just wondering in Florida, on New Orlando and Tampa Centers, can you talk a little bit about what is remaining in the process for you to get those approved and how much that's going to cost?

Well, thank you for the question, Madeline. In terms of the cost, much of the cost as I said, I think in the remarks is behind us. Right now it's much more of a resumption of the application process. Some of the key steps that remain for us is a state readiness review. In the state of Florida, it's required that we have an adult daycare license to operate there. So, we've got – still have some work to do on that application. And then ultimately, we get approvals from both CMS and the state and then a three-way agreement is signed by all parties. And so, it's our intent to move quickly. The centers there are virtually ready to go. And we're going to be approaching the state as soon as it's prudent to discuss the timing around resuming the process and we'll tackle these administrative developments in due course and we're targeting opening of the centers as early as feasible in fiscal year 2024. We have a lot of experience with this and we think now is the time to re-engage and we'll be moving on that very quickly.

Great. Thank you. And then in terms of the capacity expansion, I know you've talked a lot about the resuming enrollment in Colorado, but you also have significant capacity in centers that were not under sanction. And I was just wondering was that an intentional choice to focus on your regulatory resolutions as opposed to enrollment in those centers. Just wondering about the, sort of underutilized capacity there and how you expect to grow that and how that will impact margins as well?

Hey, Madeline, it's Barb. I'll take a crack at that. So, our capacity is not just in Colorado market. We have capacity in many of our centers, most of our centers. And this is very similar to what we said when we initially went public. We build our centers to really – to be able to serve a large number of PACE eligibles in that market. So, for example, in San Bernardino, a center not under sanction, it's a very large center that we grow. We’re growing very nicely there, but we still have a lot of capacity. So, it's not just in the sanctioned markets in Colorado, however, because we have lost about 20% of our census over the time we've been under sanction, we have a little bit more capacity than we did before sanction, but we have a lot of – most of our centers have some capacity and that's intentional.

Got it. Thank you. And then one more question on Sacramento. Is there anything about the state review in California that's different than Colorado's or just wondering about the timeline there? And if they've given you any updates on the process or anything like that?

The first thing that I would say is, CMS in the State of California and the Sacramento have worked very closely together throughout the audit period. And as, you know, we were lifted from sanctions by CMS. We haven't received any incremental requests or clarifying questions from the state, which leads us to believe that we should be hearing any day now. They've been super constructive partners and we're being as patient as possible. It's our understanding that they have seen some significant demands across the agency that could be contributing to the timing on this, but recall, we had very good audit results with CMS and we feel strongly that we've made all the systematic improvements in Sacramento and should be released, but we do [indiscernible] from state.

Great. Thanks so much.

Thank you. Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back to Patrick for closing remarks.

Well, I'll just say thank you again for everyone who has taken the time to listen into the call and look forward to spending time with you in another quarter. Thank you so much.