Good morning, and welcome to ModivCare's Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference call is being recorded.

I will now turn the call over to Kevin Ellich, Head of Investor Relations. Mr. Ellich, you may begin..

Good morning and thank you for joining ModivCare's third quarter 2022 earnings conference call and webcast. With me today is Heath Sampson, ModivCare's President, Chief Executive Officer, and Chief Financial Officer.

Before we get started, I want to remind everyone that during today's call, management will make forward-looking statements under the Private Securities Litigation Reform Act. These statements involve risks, uncertainties and other factors that may cause actual results or events to differ materially from expectations.

Information regarding these factors is contained in today's press release and in the company's filings with the SEC. We will also discuss non-GAAP financial measures to provide additional information to investors.

A definition of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures is included in our press release and Form 8-K. A replay of this conference call will be available approximately one hour after today's call concludes and will be posted on our website, modivcare.com.

This morning, Heath Sampson will begin with opening remarks. Then he will discuss our third quarter financial results and updated outlook. After his prepared comments, we will open the call for your questions. With that, I'll turn the call over to Heath. Please go ahead..

the member, the transportation provider and the customer. We are focused on one primary initiative for each value stream. First, the member value stream is focused on omnichannel experience that is unique to the specific member.

Second, the transportation provider is focused on changing the legacy transactional relationship to an empowering relationships with a smaller group of key providers that perform consistently and have the appropriate volume to scale.

And third, the customer is focused on a multilevel relationship management approach with current and prospective customers, rooted in communicating member satisfaction. Member satisfaction, especially in the competitive Medicare Advantage market, is our customers' number one priority.

Moving on to the Home division, which is comprised of our Personal Care and Remote Patient Monitoring segments. We continue to perform well in our Personal Care segment.

We are organizing our people, process and technology processes for the member, caregiver, as opposed to the transportation provider in our Mobility segment, and customer value streams. Our member and customer value streams have been operating appropriately. Therefore, most of our efforts have been focused on the caregiver value stream.

We have approximately 100 personal care locations that have historically been staffed to run end-to-end operations. However, that model does not scale.

As such, we are centralizing non-caregiver centric functions and certain operational processes, which will free up our community-based personnel to focus on care delivery and caregiver recruitment and retention. This will improve our operational results and reduce cost over time.

Additionally, we are reallocating resources and investing in senior leadership while also centralizing and standardizing to ensure we have a scalable tool set that our community-based teams can leverage.

Most of the solutions focus on caregiver retention and recruitment, but we will also improve in other areas, ranging from data collection capabilities to best-in-class compliance.

Over the last couple of months, we have made significant progress on this transformative plan, but it's not easy to convey the immense underlying work streams involved with integrating these large acquisitions. Again, I'd like to thank our team for their extraordinary efforts with integration in addition to their day jobs.

Mia Haney, COO of our Personal Care segment, and her team are starting to see the fruits of their labor payoff, evidenced by weekly record high caregiver growth metrics that continued through October. We are proud of our caregiver retention rate, which is nearly twice the industry average, and we believe this can be improved even more in the future.

During the third quarter, hours increased 2% sequentially compared to the second quarter and have continued to grow into the fourth quarter. We are encouraged by the success our team is having, and frankly, we are still in the early stages of this transformation.

As for the regulatory environment for personal care, we have been encouraged by the reimbursement rate increases this year and expect the momentum to continue.

We see a lot of tailwinds for personal care due to continued strong demand and support for rate increases, which enables us to increase wages as well as shift by payers to more value-based care arrangements, which we are participating today and will be doing more so in the future. Shifting to our Remote Patient Monitoring segment.

During the quarter, we received Medicaid credentialing in a few new states, including Nebraska and Missouri, and we expect to enter several more states by year end. We have been achieving most of our people, process and technology providers for our member, device manufacturing provider and customer value streams.

For example, we are exceeding our monitoring referral expectations and our customer satisfaction, as measured by a Net Promoter Score of 87, is well above industry benchmarks. Additionally, our member commitment to answering alerts is less than 10 seconds and is significantly faster than our competition.

Our forward-looking priorities in monitoring will focus on innovating across all value streams as there are near-term opportunities to provide new solutions to our customers quickly. And the competencies within this business will be the tip of the spear to value-based care. Turning to our enterprise-wide growth strategy.

We continue to focus on cross selling and bundling our supportive care services to managed care organizations, or MCOs. We have built strong long-term relationship with the largest MCOs in the country.

While there is great interest in our point solutions value proposition, we know from our payer partners that there is incremental value in integrating and bundling our mobility and home services together as our total addressable market is expected to expand from $80 billion to $150 billion over the next few years.

Our growth strategy is multifaceted with steady member growth from our Mobility business, coupled with strong growth from our Home businesses, driven by Medicaid growth and accelerating growth from Medicare Advantage enrollment as supplemental benefits continue to expand for our services.

Our most successful cross-selling effort to date is occurring with our E3 solution in which we engage, educate and empower our members. This is an add-on service to personal emergency response systems, PERS, or vitals, that enables health plans to close gaps in care and reduce total cost of care by tailoring programs to specific membership cohorts.

Our pipeline for additional E3 opportunities are coming from relationships associated with our broader ModivCare business. While we are in the early stages for the full rollout of value-based care strategy, our individual point solutions are already participating in value-based and risk-based arrangements today.

In Pennsylvania, our Personal Care segment has been participating in value-based contracts, receiving quality payments based on gap closure. We have seen improved quality through this comprehensive care program while improving the member experience. Importantly, these arrangements are enabled by our ability to engage and collect real-time data.

We are excited to participate in similar programs as other states continue to roll out these frameworks. Also in Personal Care, we have an early warning program that monitors members' change in condition that empowers caregivers to escalate a case for clinical intervention.

We have seen encouraging results from this program with over 50% of our clients generating alerts, leading to escalation avoidance rates in the mid-teens. For our Remote Patient Monitoring segment, we have partnered with leading health plans to improve gap closures for higher acuity members through dynamic and personalized engagement.

These programs has proven to drive results, including a 40% increase in gap closure. Without distracting the operations of our point solutions, we are dedicating the appropriate level of resources and investment to drive value-based care innovation.

As previously mentioned, we are conducting integrated pilots with a few payers focused on higher outcomes and total cost of care reduction with opportunities to generate incremental performance revenue. Our approach is to prove that our supportive care services change outcomes for high-risk, high-cost members.

Currently, our approach is to share in the cost savings as we help improve outcomes. Taking broad population risks is not a priority. I am confident that our value-based care strategy will become a meaningful long-term growth driver for ModivCare.

As noted in our point solution business updates, we've aligned our people, process and technology to focus on three value streams. Having this congruent approach across ModivCare will allow us to scale, move quickly, cross pollinate best practices and progress towards our one member, one customer vision.

Most importantly, the common value stream we are focused on is the member, which is most critical to our long-term strategy. We are building unified member profiles across our services. We will have a unique integrated offering, and importantly, collect valuable data that most healthcare service providers continually strive to collect.

Unlike many healthcare companies, we collect data during everyday life activities, which can be used to predict and intervene before a clinical need. Additionally, many of our high-risk and high-cost members likely receive one or more of our services. We see these members every day in their homes or in our vehicles.

Our payer customers struggle to engage with these most vulnerable members in a proactive manner, and we do it every day. We have created strategic clarity and our empowering our high-performing teammates to ensure we execute every day within our one member, one customer approach.

Our daily and results-focused execution will again lead to near-term growth and long-term shareholder value. I'll now review our third quarter financial results, which reported net service revenue of $648 million, which reflected growth of 31% compared to prior year period.

Adjusted net income for the third quarter was $23 million, or $1.61 per diluted share, and adjusted EBITDA was $52 million for an 8% adjusted EBITDA margin. Next, I'll review our business segment financial performance, starting with our Mobility or NEMT segment.

Third quarter NEMT revenue increased 23% year-over-year to $460 million, driven by a 23% increase in average monthly members, while revenue per member per month was up slightly.

Approximately 1 million of our average members that we reported in the third quarter were temporary in nature based on how we account for our members, and we exited the quarter with closer to 35 million members, which is an appropriate run rate to use for the fourth quarter.

Service expense for the NEMT segment, which includes all direct costs, increased approximately 30% year-over-year in the third quarter of 2022 to $395 million.

The increase was driven by higher service costs associated with a 16% increase in trip volume due to higher membership and a 14% increase in transportation cost per trip due to the general inflationary environment.

On a sequential basis, service expense per trip increased approximately 3% from the second quarter, driven by transportation provider cost increases and service level mix as inflation and higher fuel prices continue to create a headwind.

Utilization, which is defined as paid trips per member, ticked lower sequentially to 7.4%, due in part to the temporary benefit of approximately one million members that I mentioned before. NEMT segment income was $19 million in the third quarter of 2022, while NEMT adjusted EBITDA was $39 million compared to $42 million in the third quarter of 2021.

The year-over-year decrease was driven primarily by higher transportation service cost, partially offset by G&A cost leverage.

Adjusted EBITDA margin for the NEMT segment was 8.6% in the third quarter of 2022, compared to the second quarter of 2022, adjusted EBITDA declined $6 million, primarily related to lower out-of-period benefit from a favorable contract repricing which benefited second quarter adjusted EBITDA by approximately $8 million.

While we continue to experience transportation cost pressures, we are pleased with our recovery of the costs through contractual pass-through and contract repricing. Turning to our Personal Care segment. Revenue in the third quarter of 2022 was $169 million compared to approximately $119 million in the third quarter of 2021.

The increase was primarily driven by incremental revenue from the CareFinders acquisition, which closed in September of last year, as well as rate increases. On a sequential basis, revenue increased 4%.

Hours during the third quarter increased approximately 2% sequentially to $6.8 million, driven by increased service levels and our team's focus on workforce development, including recruiting and retention initiatives.

Personal Care service expense per hour, primarily representing caregiver wage expense, increased 5% sequentially due to increased wage expenses.

Although caregiver wages have increased this year, we have received reimbursement rate increases from state payers to offset these labor-related costs, while also allowing us to provide more competitive wages for our caregivers.

Personal Care segment net income increase was $1.6 million, while segment adjusted EBITDA was approximately $19 million in the third quarter of 2022 compared to $10 million from the prior year period. Adjusted EBITDA margins were 11%, which was 260 basis points higher than the third quarter of 2021 and flat sequentially.

While service expense was higher during the quarter, we've been able to drive operating cost leverage to keep margins flat quarter-over-quarter. Moving on to our Remote Patient Monitoring or RPM segment. Revenue was $19 million, which included approximately $4.7 million of contribution from the Guardian Medical Monitoring acquisition.

RPM revenue increased approximately 12% sequentially from the second quarter, primarily driven by a full quarter contribution from the Guardian acquisition, which closed in May of 2022. We have been pleased with the monthly growth in PERS referrals from our Guardian business since we completed the acquisition.

And this, in addition to the members coming on in a high contribution margin, are the key reasons for acquiring this business. RPM segment net income was $462,000 in the third quarter, while adjusted EBITDA was approximately $6.6 million, and adjusted EBITDA margins were 35.3%, in line with our long-term target for the mid-30% margin range.

Consolidated cash flow from operations in the third quarter of 2022 was a use of $6 million due to payments on contracts payable, partially offset by strong cash flow from our core operations. During the third quarter, we reduced our contract payable balance, net of our contract receivables, by $51 million to a net balance of $184 million.

We expect to reduce this net balance by an additional $40 million to $60 million during the fourth quarter, which is in line with our prior expectations. As a reminder, these payables primarily relate to overpayments and liability reserves on certain of our contracts in the NEMT segment.

Excluding the combined negative impact of $51 million from these items, our cash flow from our core business continues to be very strong. As we head into 2023, we expect a more normalized level of activity for these contracts payables, and therefore, our free cash flow is expected to be more normalized as well.

We ended the third quarter of 2022 with approximately $73 million in cash and cash equivalents and had no amounts drawn on our $325 million revolving credit facility. Our principal debt balance was flat sequentially at $1 billion, and our consolidated pro forma net leverage was four times as of September 30, 2022.

We remain committed to deleveraging over time, and we expect to reduce our net leverage ratio to three times. As a reminder, we are not exposed to rising interest rates since our current debt structure is 100% fixed rates.

Our capital allocation strategy is unchanged as we are committed to a disciplined and balanced approach towards capital deployment as we continue to deliver our balance sheet towards a three times target. Moving on to guidance.

This morning, we increased our revenue guidance range by $75 million for the year due to strong membership growth in our Mobility business and reimbursement rate increases in our Personal Care business. Revenue is expected to be in a range of $2.45 billion to $2.475 billion.

The midpoint of our revised guidance range is a 3% increase and implies 23% year-over-year growth for the full year versus 2021. We maintained our adjusted EBITDA guidance for 2022 in the range of $210 million to $220 million.

While there is only one quarter remaining this year, there is normal variability in our business segments, and it is prudent to maintain this range. While revenue growth has been strong and exceeded expectations, some of the revenue upside has been passed through to offset higher costs, thus having a neutral impact on adjusted EBITDA.

Given the strength in membership growth we've seen throughout the year, NEMT revenue growth in the third quarter was very strong. However, we think this will start to normalize in the fourth quarter back to the long-term range we provided at Investor Day in June.

Additionally, NEMT adjusted EBITDA could decline somewhat sequentially due to the lower average members compared to Q3, while margins for the year could be at the lower end of our long-term range of 9% to 12% due to higher transportation cost per trip and still being in the early stages of our mobility process and technology transformation.

For our Personal Care segment, we expect revenue growth in the mid-single digits for 2022 on a pro forma basis, and adjusted EBITDA margin is expected to be near the midpoint of our long-term range of 10% to 12%.

Our long-term outlook for Personal Care remains unchanged with revenue growth in the high-single digits through 2025 and adjusted EBITDA margins in the range of 10% to 12%. Lastly, we expect Remote Patient Monitoring growth in the low teens this year on a pro forma basis for the VRI acquisition, which annualized in September.

We expect RPM adjusted EBITDA margins in the mid-30% range for the year. Overall, we reported another solid quarter and remain encouraged about our long-term outlook as we focus on several initiatives to improve and transform our supportive care platform.

We remain confident in our growth strategy and long-term opportunities, and we will continue to engage and empower our members, providing high quality care and the best experience. Lastly, I want to thank the entire team at ModivCare for their hard work and dedication. Every one of our 20,000 teammates impacts our one member, one customer vision.

This concludes our prepared remarks. Operator, please open the call for questions..

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And we'll take our first question from Brian Tanquilut from Jefferies. Please go ahead Brain..

Hey good morning and congrats, Heath, on the announcement that now you're permanent CEO.

So, I guess just to that point, I mean, as I think about the strategy that has been laid out by ModivCare when you got there first as CFO and then now that you're CEO, how are you thinking about the parts or pieces that you still need to maybe change or add to the story? Or is it really just execution at this point? If you can share with us your vision now that you're in the CEO seat? Thank you..

Yes. Good morning. Fortunately, the vision and the set of solutions we have and the marketplace and what's happening in health care, all that's the same. So we're fortunate to be in a great spot and have the right people and tools in place for that. It really is about how we do it now, how we execute on that vision.

And I do think over the last 90 days, and that will continue, we have a lot of clarity on what we need to do in each of our, I call it point solutions, I've said that. And then probably the item that's probably most different than maybe the last couple quarters is that what are we doing on bringing these assets together.

Really what needs to happen to change outcomes. Not necessarily get all the way to the risk-bearing side of what a lot of other competitors do, but for us, just really focusing on the assets we have and bringing together, cross selling, bundling and then changing outcomes for our payers and states. So, in summary, it really is.

It really is about execution, aligning the people, aligning the process and then building the right fit-for-purpose tech and executing, because the market's there and the opportunities are there in front of us..

Got you.

And then just to clarify, as I think about the payables again, the rebates or refunds due to declines in the NEMT side, how are you thinking about the progression of that, say, for the next two quarters? How much left should we be thinking you'd have to pay back?.

Yes. So, consistent with what we've been saying for the last couple quarters, this year was going to be -- we're going to pay down the majority of that larger balance. And we have about $40 million to $60 million left for the fourth quarter.

And then after that, we'll be back to normalized working capital fluctuations, therefore allowing us to have additional free cash flow to delever or do what we think is appropriate. So, one more quarter left, and then we'll be back to more normalized working capital..

Got you. And then last question for me, if I may. So, as I think about your guidance, and you did $52 million of EBITDA in Q3. So, the plug for Q4 looks like it's roughly $48 million to hit the high end of that guidance range.

Is there anything I need to be thinking about? I'm curious if it's the sequential seasonality of your business, or is this just conservatism?.

I do think from a seasonality perspective, stuff does come down a little bit, but I wouldn't overplay that. It's because of the holidays, right? People take less trips or don't go to the doctor as much. But really, it's not that large. So, I think it's the right forecast.

And whether you say conservative or not, I think it's the right way to think about it right now. And we're comfortable with how we're coming out for the fourth quarter and how you were modeling it out..

Awesome. Congrats again. Thanks guys..

Hey thanks Brian..

Thank you. And we'll take our next question from Bob Labick from CJS Securities. Please go ahead Bob..

Good morning. It's Bob Labick. And Heath, congratulations on the well-deserved promotion, getting rid of the interim title, whatever you want to call it. Congrats..

Yes. No, thanks, Bob. Appreciate it..

Yes. No, it's great. We talked about this a little bit. I want to talk about member growth. It was up sequentially. I know you pointed out the $1 million kind of -- one million incremental temporary. But even if you take out that one million, there's been strong member growth sequentially each quarter this year.

Can you maybe talk about the drivers, how we should think about that? And then how we should think about Medicaid redetermination next year and how that will play through the P&L and through NEMT..

Yes. So, the membership growth, our team should be proud of what we've been doing there. Yes, there is just the normal growth that has been happening with Medicaid and Medicare Advantage. But we are higher than those growth rates due to us adding on business primarily with our current customers and primarily with our large kind of big six payers.

So, that growth has been to all the great work that we've been doing operationally, and then with our account management and sales group adding on volume in specific states that we have or do not have.

So, it's a combination, again, of just the normal growth that happens in the market, but really, we are growing above that because of the good work that we're doing..

Okay, great. And then--.

Redetermination, consistent with what we said in our earnings -- sorry, our Investor Day in the early part of the summer, we believe on our mix of states, what is going to potentially happen with redetermination, we'll be able to grow through that.

So, we're consistent with that, and I expect that to still be our stance on redetermination and where we expect growth to be in the fourth quarter and then through 2023..

Okay. Super. And then you touched on the inflationary environment that we all see and the lack of drivers and transportation providers and things like that.

Maybe talk just a little bit more about the progress with a partnership model with transportation providers, and when we might see the purchase services per trip either level off and then hopefully start to trend down at some point.

What are the kind of tipping points you're looking for there? And how should we think about purchase service per trip trends over the next several quarters?.

Yes. So, the strategy on having a partnership model with our transportation providers is really clear to all of us and specifically to me of what needs to happen. And the reason for that, where we have done this, tested this, it's working very well. Whether that's with our own internal TNC that's like an Uber and Lyft, we're seeing the success there.

And in addition, where we have moved to this partnership model with some of the larger providers, we're seeing it there. So we know it's there. The rollout of having that across the entire network has been okay. That really is the focus of where we need to go so it's more than just okay. And that's what we're driving towards.

So, we have a lot of clarity. We were just -- I was just talking to the team before that -- but a lot of clarity on what needs to happen. Now we're aligning all the teams to ensure that that happens. Because you look at where, yes, there is challenges with the macro environment that is affecting labor and cost.

But when you can dissect that a little bit, when you give people more volume, that far outweighs that rate challenge that we're having. So, I feel really good about the strategy, and now it's about really putting the pedal down to execute on that. I think it's something these next three, four months that we're really pushing hard on.

And I expect that to start lowering in the mid-part of next year that I expect meaningful kind of decrease and overcoming those macro environment headwinds..

Got it. Super. Thank you very much..

Thank you. And our next question comes from Brooks O'Neil from Lake Street Capital. Please go ahead..

Good morning Heath. I also want to offer my congratulations. So, I'm curious; you talked a little bit about favorable reimbursement, particularly in the Personal Care segment. I'm hoping you could provide a little bit more specificity around that. And I'm also curious about reimbursement related to fuel costs and labor issues on the Mobility business.

You could just talk a little bit about what you're seeing there specifically..

Yes. So, you're right to separate the two segments, because the favorable reimbursement rates are in our Home business, and specifically within our Personal Care business, in the states that we are participating in. And those, since really mid-summer and earlier, we've seen across all of our markets favorable increase in rates, reimbursement rates.

The mix on those reimbursement rates, a large chunk of them have been required or we have kind of path through to our caregivers. And all that is great because it's allowing us to be competitive or more competitive in the marketplace. So, those reimbursement rates have gone up anywhere from a couple percent to well over 10%, 15%.

And you can see the metrics that we have in our financials. But you can also see the metrics of the costs going up. So net-net, where that comes down to, we're in that kind of 11-ish percentage EBITDA margins, kind of in the midrange of our targets.

But what that's going to do, coupled with what Mia and her team are doing, it's going to allow us to grow. And that's really the whole benefit and point, and which is why the states have done this. And this system, what we've said before, the demand for these services far outweigh all of the industry's ability to fulfill those.

So this has been positive for us, positive for the industry. And now, like I said before, we're starting to see that pay off with the work we've done. So, I expect growth to happen, and I expect our margins to kind of maintain where they are and increase as we move through this integration.

So, that's very positive for the industry, and it's a big driver for our performance that we are today. On the transportation side, as you know, most of our -- 85% of our contracts are capitated. So, there's really no kind of reimbursement change in the NEMT side. It is really about how we manage through that.

In addition, and this is also something we've done over the last 12 to 18 months, is ensuring our contracts have been structured so we have a win-win, and able to share in these increased costs that are currently happening primarily in the transportation with the driver. So, that's been beneficial to us.

So, those costs have come up that our transportation providers actually have to bear. At the same time, we want to make sure that they are making money, and most importantly, ensuring that we are picking people up on time and having a great member experience because that is the most important thing for our customers.

And therefore, because of our contracts, we're able to pass those through to a lot of our customers as well, or call it share in those costs. So that's the differences between what's happening on the reimbursement rate on the personal care side, specifically in the home business.

And then the higher cost in the mobility, we're able to pass a large chunk of those through based on the way we've developed our contracts..

Great. That's very helpful. So, I know you talked a little bit about labor in your prepared comments, but that's the other dynamic that has been particularly interesting in the country over the last year or two, whatever you want to say. So, I know you're working hard, particularly in Personal Care, to improve your recruiting.

But can you just give us a quick update on your outlook for the labor environment, again, in both sides of the business?.

Yes. So, the labor environment for the Personal Care side is really about growth. it's really had our growth to be not as high as we want, and we've been growing in that kind of single digit range.

However, the work that we are doing, we expect to overcome those macro headwinds because, one, we're going to integrate and free up -- sorry, integrate, coupled with the reimbursement rate, we're able to grow through that and actually recruit and retain more people.

In addition, on the macro environment, if there is a recession or this continues to be the way it is, that actually helps us in that field personnel recruiting, and we're starting to see that as well. In addition, there could be also increases in the Medicaid role.

So, in general, on the Personal Care side, because of what we've done, because of the reimbursement rates, and then in general, what that does for our ability to probably get more people in the door, we feel good about where we are and where we're going to continue to be going forward.

On the transportation side, similar to what I said before, those headwinds are real, and the costs are higher than we expected. However, our plans on what we need to do with primarily the partnership model, we're going to grow through those challenges.

Because of our size and scale, when we appropriately assign volume to our key providers, that far outweighs the challenges that we're having on a rate basis that is driven by the economy.

Net-net, regardless of where the macro environment is, the stuff we're doing is going to overcome that, or in some cases, if that continues, it's going to help us drive and grow because we'll be able to recruit better on the personal care side..

Great. Let me just ask one more. You talked a little bit about value-based care. And I am personally a huge believer in the opportunity of value-based care. But can you just say, is that opportunity growing, in your mind? Maybe highlight one or two places where you really see opportunity for ModivCare to play in a value-based environment..

Yes. So, this is -- we've gotten a lot of clarity here over the last couple months and quarters on what we do and how we participate. One thing we know for sure, the supportive care services we have do have an impact on outcomes. And really for us, it's been refining that strategy and what we need to do to actually have that continue to happen.

As I noted on my call, in our Personal Care business, we are doing work that gets us paid for changing outcomes. In addition, in our monitoring business, we know that we actually do change outcomes. So, for us, I think a lot of people when you talk about value-based care, you completely go to taking full risk on populations. And yes, that can happen.

But for us, really, it is focusing on how our services, how we connect to those most vulnerable populations, which are primarily duals, or have high acuity issues like diabetes, when we have an understanding of those patients, which is what we have been doing right now, we know that we can change those outcomes.

And that's what we've been doing, getting specific on that and getting specific with our customers or other entities that we normally haven't been working with, and we're seeing a lot of success there. And then I said this also in my comments, and this is important from an operational perspective.

You have to dedicate the right level of people to ensure that you focus on that. And we have done that. And when you focus on something and you focus on things in the right way, which is doing the stuff that I articulated, we're going to see that continue to grow. So, we have high expectations for continuing to move into that value-based care area.

And I look forward to -- at the same time, we're going to be deliberate and diligent in how we do it without distracting the great opportunities we have on growth and performance in our point solutions..

Absolutely. Makes sense..

Going forward, you'll see more and more data from us showing the payments that we are actually getting from value-based care like we are today..

Great. Let me just ask you one more. I apologize. New states on the personal care business. Obviously you're in seven or eight northeastern states. I'm curious how you're thinking about the opportunity to expand the geography as well as deepen penetration in your existing states..

Yes, it really is about growing within the states we are. There's a lot of opportunity for us to grow organically. Even though we're number one or number two in our big three states or other states, and even within those states, we can grow. And we'll grow with -- continue to take more referrals as well as open up de novo locations.

That's the priority right now; organically grow in the markets that we're in..

Great. Thank you very much..

Thank you..

Thank you. And we'll take our next question from Pito Chickering from Deutsche Bank. Please go ahead..

Hey, good morning guys. A couple questions here. I guess from a high-level perspective; your guidance assumes lower margins.

As we enter fourth quarter, do you think that the inflationary pressures are now normalized in the fourth quarter? Or will you see these sort of -- this outsized inflation pressure continue into 2023? And do you think the Street generally models for 2023 EBITDA correctly?.

Yes. So, for our home business, I think we are at that peak. And we will see the benefits of what we are doing kind of will get better and better, both from a growth perspective and then from a margin perspective on our own business.

The transportation side, similar to what I said before, is where those pressures have been continuing to grow for the last couple quarters.

What Bob said, too, I think what we're doing with -- on the operational side with the changes that we are making on process and tech primarily around the partnership model, I think that we can overcome those inflationary pressures even if they accelerate into Q2 and Q3. So, I think our -- we'll be able to get through that.

And I don't expect us to see any more margin pressure beyond what we're seeing in Q3 and expect in Q4. And again, expect improvements in the mid-part of 2023 as these actions really take hold..

Okay.

And then sort of 2023 EBITDA, is that generally in the ballpark where the Street has it modeled?.

Sorry, say that again?.

Has the Street model 2023 EBITDA in the right ballpark? I guess any color around that?.

Yes. Sorry, you cut out again. Go ahead..

Yes. Pito, we'll give guidance next quarter..

Okay, fair enough. All right. So, on NEMT, maybe I missed this, but you talked about one million members sort of not occurring in 4Q. And I think in the script, you talked about declining membership.

Was there a contract loss, or kind of how do I reconcile that 1 million members sort of not continuing into the fourth quarter?.

So, that 1 million members has nothing to do with contract loss. It has to do with how we recognized Q3 with -- from a standpoint of we had one-time kind of catch-up revenue in that quarter, therefore that affected and grew the membership.

So membership, when you take that one million out, it is because of how we recognized our one-time revenue in that. So, membership, when you normalize for that, it's actually continuing to increase. So you should not say that by any means is there any degradation with a change in our ability to gain membership or grow.

So I'm glad you asked that question because it is a timing accounting issue; not a performance issue..

Okay, perfect. And then last question for me on -- you referenced a contract repricing driving sort of that pricing, that 1.1% sequentially.

I guess, how much was that contract declining in kind of all this fall to that level?.

How much was declining? So, our contracts have not been declining. What the point of the contract discussion was to show that we have been, over the last 18 months, renegotiating contracts to ensure that they are a win-win, and in essence, protecting the downside in the event that there's some volatility in costs or utilization.

So, our contracts are working, which is why I feel really good about the margins that we have been articulating. That was the whole point of the contract discussion, to ensure that we're doing the right stuff and our numbers have rigid earnings as opposed to maybe the volatility that was -- that happened pre-COVID..

Okay. Thanks so much..

[Operator Instructions] And we will go to Scott Fidel from Stephens next. Please go ahead Scott..

Hi, this is Raj for Scott. Good morning. So, I have a question relating about the Matrix impairment loss. Maybe if you can give us some more color on what drove that in the quarter..

Yes. So, Matrix, as we've talked about Matrix, especially during the COVID time had a lot of growth, primarily in their non-core risk adjustment, risk assessment business.

As we have moved through the last couple quarters, it is most important for us to pivot the strategy back to the core, because we know that there's a lot of growth in risk assessment, primarily supported by what's happening in MA. So, that's a great business with a lot of market tailwinds.

So, what the Matrix management team has done, which is new, have done a great job on that business and really getting it back to performing the way it had before kind of COVID. However, the challenging part is the business that we invested in around COVID, we thought that those businesses would do well in a post-COVID environment.

That's not working out. So, that's where the pivot has come, away from those businesses. And as we disclosed, or was disclosed a few months ago, we divested ourselves of the clinical trials business.

So, basically, it is appropriately reallocating our resources and focus to the core where there's a lot of growth and a lot of opportunity in the risk assessment business. And that has resulted in us taking impairments on those acquisitions we made a few years ago, again, which had the bump in COVID and we no longer think are strategic for us.

So, that's the way to view it. I know it's not good to see, but at the same time, from a performance and future perspective, we're most excited about what they're doing. And we look forward to the next number of quarters as we work through and really grow that risk assessment business back to what it was..

All right. Thanks for the color. And then just pivoting from there, just wanted to ask about the strategy behind the meal delivery business. I know, as previously alluded, that maybe you'd give us some like quarterly updates on that, and maybe we will hear more about that in the 4Q call. But any color on that would be great..

Yes. So, when you think about social determinants of health, meals is really important. Our payers and states, meals is very important. And there's two components of meals. It is the, primarily on the Medicaid side, helping people ensure that they have meals on a continuous basis.

And then there's really more episodic, when people get out of the hospital, having meals for one month or two months. Both of those are extremely important and continue to grow. For us, we are appropriately allocating resources to ensure that we can execute in that business. I think it's really important.

And the reason why I haven't talked about it much in this call is because we have a lot to focus on. And in general, for us to continue to grow and to continue to do things like taking our vision, we need to focus and prioritize appropriately, and that's what we're doing. And -- but that doesn't mean that meals is not important to our company.

When it becomes more meaningful and I have the right conviction around what we're going to do, we'll talk about it more. So, it really is a prioritization and focus issue versus my maybe confidence in that business. So, our plans -- and we just had quarterly meetings around all of this, and we actually have some meetings next month around meals.

As it starts to prove out the business case, which I expect to happen, we'll start talking to you more around that and what it's going to mean to our strategy, and as importantly, what it means to our financial picture. So, more to come..

All right. That’s all for me. Thank you..

And we'll take our next question from Mike Petusky from Barrington Research. Please go ahead..

Good morning. And I did miss some of this call, so if you touched on either of these issues, forgive.

Have you given an update on maybe a timetable you hope to have a new CFO in the chair?.

So, the initiatives that I laid out for the next 90 days, I expect all those to happen. So within the next 90 days, I expect to have a new CFO. Again, the good thing is here for the finance side to have strong leaders that are around the table with me, and our ability to execute and do what we're doing, I feel really confident about.

But at the same time, we're searching hard to make sure that we find the right person, and I expect that to happen within the next 90 days..

And have you guys given an update on the transportation contract pipeline? Anything that you can say there?.

So, we can -- so it gets to what I talked about before around membership growth. A lot of the work that has been done by our account management team and sales team, we are seeing us adding additional volume on -- to our current customers. So, great success there. And that also shows that we are not losing that volume.

So, for us, we continue to do very well on maintaining and winning our customers. And we will announce large wins when they come on each quarter to us. So, right now, some of the stuff around specifically what's happened in COVID, a lot of the larger states have pushed out or delayed a lot of what has happened because of COVID.

So there hasn't been a lot of movement in the market around large contracts. One side of the coin is that benefits us because we're the largest. The other side of it is, it hasn't allowed us to kind of close on big contracts that we expected to close on. So, more to come, and we'll announce it--.

Yes, could I ask a follow-up on that? Can you give -- even if there's not much to say, can you give any update that there might be on New York and also any other big ones that could be determined, say, between now and the end of 2023? Thanks..

Yes. So, you're right. There are big ones that will likely be resolved in 2023. Probably not even early 2023. Like New York specifically, that's a very large contract, and they're switching from a broker model to a non-broker model. So, TBD on that. I won't hear anything this year. Hopefully the early part of 2023, we'll hear where that falls out.

As a reminder, we have good business in New York right now, and that's a good thing and so we're keeping it there. So, we feel good about where we are and more to happen in 2023. And at the other states as well that have said they've come out or will come out, I do expect that, to know more in Q1.

But likely those coming on in 2023 would be the latter part of 2023. So, different than what we talked about in 2022. Again, it gets back to a lot of the states, which where those big ones are, have just continued to delay and push out. More updates probably in Q1 around timing on that and what it means to us in -- next year..

Okay. And then just a last question. On states that really matter to you guys and just in general, I guess, the election is coming up next week. I mean, do you guys care? Do you have a rooting interest in terms of your business and how the election shakes out next week? That's all I've got. Thanks..

Yes. The good thing for us, the way transportation has been put aside, I don't -- I feel good about transportation and its ability in every state and across the country to grow. And the same thing in our other business. So, it's really agnostic to the politics that are out there..

Thank you..

And that was our final question. I'd like to turn the floor back to Heath Sampson for closing remarks..

Yes, I want to thank everybody for participating in our call this morning. Our updated investor presentation and quarterly supplemental deck are posted on our Investor Relations website. And if you have any questions or have anything that you need to follow-up on, please get in touch with Kevin, who's the Head of our Investor Relations.

Again, thanks for joining. I'm excited about what we have in front of us. Excited and thankful for the team and what they've been doing. So, I look forward to talking to you all in February 2023. Thanks again..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day..